Petition for Writ of Certiorari — Forest Laboratories, Inc. v. Abbott Laboratories

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Supreme Court, U.S.

FILED

No. 03 > B94 NW 5 2003

> TYE FRY

IN THE

Supreme Court of the United States

FOREST LABORATORIES, INC. and ONY INC.,

Petitioners,

ABBOTT LABORATORIES,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

PETITION FOR A WRIT OF CERTIORARI

HERBERT F. SCHWARTZ

Counsel of Record

KENNETH B. HERMAN

FisH & NEAVE

1251 Avenue of the Americas

New York, New York 10020

(212) 596-9000

Attorneys for Petitioners

183652 ce

COUNSEL PRESS

(800) 274-3321 * (800) 359-6859

QUESTIONS PRESENTED

This petition is one of two submitted within one week

in different cases seeking review of the Federal Circuit’s

“bright-line” rule limiting the district courts’ discretion to

award reasonable attorney fees as a result of misconduct by

a party in a patent case. The questions presented here are:

1. Did the Court of Appeals for the Federal Circuit err

in establishing a “bright-line” rule defining only certain

conduct as “exceptional” under 35 U.S.C. § 285 and thereby

limiting the discretion of federal district courts to prevent

gross injustice by awarding attorney fees to a prevailing party

because of pre-litigation misconduct?

2. Did the Court of Appeals for the Federal Circuit err

in holding that clear and convincing evidence of pre-litigation

misconduct that gave rise to a finding of equitable estoppel

cannot, as a matter of law, make a patent case “exceptional”?

CORPORATE DISCLOSURE STATEMENT

Petitioners Forest Laboratories, Inc. and ONY Inc. have

no parent companies. There are no publicly-held companies

that own ten percent or more of the stock of the petitioners.

TABLE OF CONTENTS

Questions Presented ............-- eee eeeeeee

Corporate Disclosure Statement ..........-----.

Oe STE eee eee ee ee ee

Table of Cited Authorities ..............ceceee.

Table of Appendices .........--. eee cece renee

Opinions Below .......:..---seee seer eee eeeee

Deeieemeel GO SOTISGICHION 2... 2... eee eee sees

Statutory Provision Involved ..........-.+++++

EEE SN EEE ee ee

Reasons for Granting the Petition .............--

Conclusion

se ae oe ee eo ee ee Se Se ee eS SAS eS Pe Pe

Page

TABLE OF CITED AUTHORITIES

Page

CASES J

Aromatique, Inc. v. Gold Seal, Inc.,

po OE ge ee ere 17, 18

- Brasseler, U.S.A. I, L.P. v: Stryker Sales Corp.,

267 F.36 1370 (Fed. Cw. 2001). wn. ccc ceees 15

Brennan v. Hawley Prods. Co.,

98 F. Supp. 369 (N.D. Tl. 1951) ............. 13,14

Cambridge Prods., Ltd. v. Penn Nutrients, Inc.,

962 F.2d 1048 (Fed. Cir. 1992)... 66.0 escccs 15, 16

Festo Corp. v. Shoketsu Kinzoku Kogyo

Kabushiki Co.,

ee Sie FR ERED es che oot e este xsesceees 10, 11

Fogerty v. Fantasy, Inc., ;

es AEF CPOE 6h eV eRe eee e eee 17

Hoffmann-La Roche Inc. v. Invamed Inc.,

213 £.36 1599 (POG. Cit, ZO0U) wn i viccss 15

L.A. Gear, Inc. v. Thom McAn Shoe Co.,

966 F.20 1117 (red. Cir. 19935)... «606 se cee es 13

McNeil-PPC, Inc. v. L. Perrigo Co.,

337 F.30 1362 (Fed. Cir. 20035)... 6. es ene 3, 4, 10

Cited Authorities

Page

Rohm & Haas Co. v. Crystal Chem. Co.,

736 F.2d 668 (ed Cir. 1964) ...... 260 cceveess 13

Yarway Corp. v. Eur-Control USA, Inc.,

TTS 8.26 268 Ded. Cie. TIES) jcc cctcccionss 15, 16

STATUTES AND LEGISLATIVE MATERIALS

15 U.S.C. § 1117(a) (Supp. 2003) .............. 6,17

yy, BUR See Be. |) eeeeererrrr errr re ry 2

(Eis tom Bo). Seererrr reese errr 3, ha

35 USL... 6 TORT) ics veveki enters tates 12

35 USL. © 259 CIOS) os vas vine veces eeeeses 6, 12

33 U.S.C. § TES GOGE) sce era eeee re cnvscyees passim

35 U.S.C. § 285, Revision Note, reprinted in 1952

PE CE AM Pe ee 656s cae eda eee 6, 12

Patent Rights — Protection, S. Rep. No. 79-1503

(June 14, 1946), reprinted in 1946 U.S.C.C.A.N.

Pk Ss sppeereretetretr rte. ce 5, 11-12

Patent Rights — Protection, ch. 726, Pub. L. No.

79-587 (Aug. 1, 1946), reprinted in 1946

ts fat oS Sere er ye 5, 12

TABLE OFAPPENDICES

Appendix A — Opinion Of The United States Court

Of Appeals For The Federal Circuit Filed August

i ee re yee ee ee ee ar?

Appendix B — Decision And Order Of The United

States District Court For The Western District Of

New York Filed September 30, 2002 ..........

Appendix C — Decision And Order Of The United

States District Court For The Western District Of

New York Filed September 4, 2001 ...........

Appendix D — Opinion Of The United States

District Court For The Western District Of New

York Decided June 23, 1999 ................

Page

l3a

15a

]

No. 03-

IN THE

Supreme Court of the United States

FOREST LABORATORIES, INC. and ONY INC.,

Petitioners,

ABBOTT LABORATORIES,

Respondent.

On PETITION FOR A WRIT OF CERTIORARI TO THE

UNitTED STATES CouRT OF APPEALS

FOR THE FEDERAL CIRCUIT

PETITION FOR A WRIT OF CERTIORARI

Petitioners Forest Laboratories, Inc. and ONY Inc.

respectfully petition for a writ of certiorari to review the

judgment of the United States Court of Appeals for the

Federal Circuit in this case. ~

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. 1a-12a)

is reported at 339 F.3d 1324. The opinions of the United

States District Court for the Western District of New York

(Pet. App. 13a-31a and 32a-90a) are unreported.

STATEMENT OF JURISDICTION

The judgment of the court of appeals was entered on

August 7, 2003. The jurisdiction of this Court is invoked

under 28 U.S.C. § 1254(1).

STATUTORY PROVISION INVOLVED

This case presents an issue of how Section 285 of Title

35 of the United States Code is interpreted. Section 285

provides that: —

The court in exceptional cases may award

reasonable attorney fees to the prevailing party.

STATEMENT OF THE CASE

The court of appeals’ decision eviscerates the intent of

35 U.S.C. § 285 to compensate the wronged party. After a

four-month trial, the district court awarded attorney fees to

petitioners Forest Laboratories, Inc. (“Forest”) and ONY Inc.

(“ONY”), under § 285. The district court found by clear and

convincing evidence that respondent Abbott Laboratories

(“Abbott”) had engaged in bad-faith conduct by repeatedly

encouraging Forest and ONY over an eleven-year period to

pursue the development of Infasurf® — a surfactant

replacement drug used to treat the lungs of premature

oi aaa

babies. Abbott did so because it “was betting on two horses.”

Pet. App. 22a. Before its own drug — Survanta® — received

regulatory approval, Abbott was encouraging ONY to proceed

with the development of Infasurf® so that it could rely on

Infasurf® as its backup drug in the event that Survanta®

failed to obtain approval. But once Survanta® was approved

by the FDA, Abbott did an about-face and charged ONY and

Forest with infringement, prompting the suit that ultimately

led to the attorney fees award.

The district court found that petitioners did not infringe

and that Abbott was barred by equitable estoppel from

asserting its patents against petitioners. After finding clear

and convincing evidence that Abbott had acted in bad faith,

the district court awarded Forest and ONY fees and expenses

to avoid a “gross injustice” and to deter other companies

from similar conduct in the future.

The court of appeals reversed. Announcing a new

“bright-line” rule, it held that “exceptional cases” are only

those involving misconduct during litigation, inequitable

conduct before the patent office, willful infringement, or

a frivolous suit. It concluded that all other types of pre-

litigation misconduct, such as Abbott’s bad-faith conduct,

which led to a finding of equitable estoppel, cannot, as a

matter of law, be deemed “exceptional.” '

1. In McNeil-PPC, Inc. v. L. Perrigo Co., 337 F.3d 1362 (Fed. Cir.

2003), also a case involving pharmaceuticals, decided six days before

the ruling in this case, the Federal Circuit also reversed a district court’s

award of attorney fees to a prevailing alleged patent infringer for failure

to satisfy its new bright-line test. The Eastern District of Pennsylvania

did not find that McNeil had committed inequitable conduct before the

Patent Office, but awarded attorney fees to Perrigo based on a finding,

(Cont'd)

COASTER 7 ET IT ITE EES

The court of appeals’ decision is contrary to the statutory

intent of 35 U.S.C. § 285 and to the treatment by another circuit

court of appeals of the analogous statute in trademark.

The court of appeals justified its treatment of Abbott’s

pre-litigation conduct on the grounds that “the consequence

of estoppel is loss of the cause of action.” Pet. App. 9a. This,

however, does nothing to compensate petitioners for the

substantial fees they incurred and for the time their product was

delayed because of Abbott’s misconduct. The court of appeals’

rationale simply undermines the purpose of § 285, which is to

prevent gross injustice to the harmed party. The award of fees

contemplated by § 285 is not a mere technicality, but rather a

part of a legislative provision that regulates the course of conduct

that ultimately becomes the subject of litigation.

A. Statutory Framework. The question in this case is

straightforward: may the court of appeals create a rigid definition

of “exceptional case” that limits the circumstances under which

the district court may exercise its discretion to award attorney

fees? Section 285 of the Patent Act is the statutory provision

addressed to attorney fees. It provides, in its entirety, that “[t]he

court in exceptional cases may award reasonable attorney fees

to the prevailing party.” 35 U.S.C. § 285 (2001).

(Cont'd)

which the court of appeals found was “not clearly erroneous,” that ~

McNeil prosecuted the pertinent patent applications with “‘studied and

deceptive ignorance.’” Jd. at 1371. The court of appeals, however, held

that because McNceil’s misconduct did not rise to the level of “clear arid

convincing evidence of inequitable conduct [before the PTO] or

misconduct during litigation,” it could not result in an award of attorney

fees because it was not one of its identified bright-line “‘exceptional’”

circumstances. Jd. at 1372. Perrigo has recently filed a petition for a

writ of certiorari also seeking this Court’s review of the court of appeals’

new bright-line rule.

Section 285 was enacted to prevent a gross injustice to a

prevailing accused infringer and was not limited simply to

compensate a prevailing patentee. Patent Rights — Protection,

S. Rep. No. 79-1503 (June 14, 1946), reprinted in 1946

U.S.C.C.A.N. 1386-87. Prior to 1946, attorney fees were not

recover only profits and damages. Patent Rights — Protection,

S. Rep. No. 79-1503 (June 14, 1946), reprinted in 1946

U.S.C.C.A.N. 1387.

In 1946, an amendment to the damages section of the patent

the Senate Committee on Patents states that “the provision

relating to attorney’s fees is made discretionary with the court.”

Patent Rights — Protection, S. Rep. No. 79-1503 (June 14, 1946),

reprinted in 1946 U.S.C.C.A.N. 1387. The Committee added

that

the discretion given the court in this respect . . . will

discourage infringement of a patent by anyone

thinking that al! he would be required to pay if he

loses the suit would be a royalty. The provision is

also made general so as to enable the court to

prevent a gross injustice to an alleged infringer.

Id. (emphasis added).

The 1952 Patent Act placed the attorney fees provision in

35 U.S.C. § 285 and amended it to its current form.

35 U.S.C. § 285 (1954). It did not substantively change the

provision. 35 U.S.C. § 285, Revision Note, reprinted in 1952

U.S.C.C.A.N. 2403, 2423. The Revised Note states that

§ 285 “is substantially the same as the corresponding provision

in R.S. 4921 [the 1946 version]; ‘in exceptional cases’ has been

added as expressing the intention of the present statute as shown

by its legislative history and as interpreted by the courts.” /d.

Like the patent statute, the Lanham Act provides that

“(t]he court in exceptional cases may award reasonable attorney

fees to the prevailing party” in a trademark action. 15 U.S.C.

§ 1117(a) (Supp. 2003).

B. This Litigation. Petitioner ONY developed Infasurf®,

the first lung surfactant replacement therapy used in the United

States for treating respiratory distress syndrome in premature

babies. Infasurf® utilizes as its active ingredient calf lung

surfactant extract (“CLSE”’). Beginning in 1983, ONY discussed

CLSE with respondent Abbott. Between 1983 and 1991, Abbott

actively encouraged petitioner ONY to pursue the development

and clinical testing of CLSE and was fully aware that they

intended to commercialize it. Abbott also knew in June 1991

that ONY and Forest became partners to further develop and

market Infasurf®.

Abbott is the exclusive licensee of U.S. Patent Nos.

4,338,301 and 4,397,839 owned by Tokyo Tanabe Company

Ltd. (“the Tanabe patents”). Abbott did not raise the question of

possible infringement by CLSE of the Tanabe patents until it

wrote to Forest in June 1994 — eleven years after Abbott first

met with ONY to discuss CLSE. In fact, in 1984, Abbott

conducted a patentability search for Infasurf® and led Forest

and ONY to believe that Infasurf® was not covered by any

patents — including the Tokyo Tanabe patents. Abbott was

aware that ONY was then telling the world that Infasurf®

was not covered by patents and Abbott did not say anything

contrary.

Abbott did not raise its infringement allegations until a

decade later. At that time, ONY and Forest provided Abbott

with samples of Infasurf® and a memorandum detailing

why Infasurf® did not infringe. When Abbott continued

threatening litigation for more than one and one-half years,

Forest and ONY filed suit for a declaratory judgment in

March 1996. After more than three years of litigation, the

district court found that Infasurf® did not infringe the Tanabe

patents — on the same grounds set forth in the non-

infringement memorandum — and that Abbott was equitably

estopped from asserting those patents against ONY and

Forest. The court of appeals affirmed the judgment of no

infringement and, having done so, declined to reach the issue

of equitable estoppel.

Following the appeal, the district court granted ONY and

Forest’s motion for attorney fees, finding by clear and

convincing evidence that Abbott had acted in bad faith. Pet.

App. 13a-3la. It held that “Abbott misled ONY and Forest

into reasonably believing that Abbott did not intend to enforce

the Tokyo Tanabe patents against them” (Pet. App. 22a) and

that Abbott had pursued its allegations of infringement “with

a reckless disregard for the facts in an attempt to prevent

Infasurf® from reaching the market.” Pet. App. 25a.

In its separate opinion holding that Abbott was equitably

estopped, which it incorporated by reference into its opinion

awarding attorney fees, the district court concluded that

‘“Abbott’s failure to mention possible infringement before

1994 was sufficiently misleading to amount to bad faith.”

Pet. App. 68a. The district court highlighted numerous

specific examples of Abbott’s misleading conduct from

1983 to 1991, and catalogued that conduct as: “Initial

Encouragement and Patentability Search”; “Contacts

Between June 1984 and April 1986”; “April 1986 Meeting”;

and “Contacts Between 1987 and 1991.” Pet. App. 51a-59a.

The district court also described how “Abbott monitored

CLSE, ONY and Forest” for many years but did not allege

infringement. Pet. App. 59a.

The district court, in fact, characterized Abbott’s conduct

as “betting on two horses,” meaning it was seemingly

cooperating with petitioners while developing its own

surfactant product. Pet. App. 22a. Abbott did so to remain

free to finalize a collaboration with petitioners if its own

product — Survanta® — failed to obtain FDA approval.

Pet. App. 22a-23a.

Abbott never offered an adequate explanation for its

conduct. Pet. App. 23a. Abbott declined to call the three

Abbott employees from its witness list who would have been

in the best position to explain Abbott’s actions (if the actions

could have been explained). Pet. App. 23a. As the district

court observed, “once [ONY and Forest] put forth sufficient

evidence to establish an equitable estoppel defense ...

[i]t was up to Abbott to either rebut such evidence or run the

risk of an adverse verdict. Abbott chose the latter option.”

Pet. App. 23a.

The district court concluded that “Abbott’s bad faith

conduct makes this an ‘exceptional’ case for purposes of

§ 285, and that Abbott should be required to pay attorneys’

fees in order to prevent a gross injustice to ONY and Forest

and to deter Abbott and other patentees from similar conduct

in the future.” Pet. App. 27a.

On appeal, Abbott argued, among other things, “that its

private pre-litigation conduct was an inappropriate ground

‘on which to base a finding of exceptionality.” Pet. App. 6a.

Forest and ONY maintained that a finding of exceptionality

based on pre-litigation misconduct was within the discretion

of the district court, and that Abbott had presented no legal

support to the contrary. Pet. App. 7a.

The court of appeals reversed. The court of appeals

“agree[d] with Abbott that the district court erred in

awarding attorney fees to ONY and Forest.” Pet. App. 7a.

It “conclude[d] that the court erred finding this case to be

‘exceptional’ under 35 U.S.C. § 285.” Pet. App. 12a.

It reasoned that it had “repeatedly identified as ‘exceptional’

those cases involving ‘inequitable conduct before the [Patent

Office]; litigation misconduct; vexatious, unjustified, and

otherwise bad faith litigation; a frivolous suit or willful

infringement.’” Pet. App. 8a (citations omitted). It found that

the district court’s ruling of exceptionality “due to Abbott’s

bad-faith conduct which led to a holding of equitable

estoppel” amounted to an “expansive reading of § 285.” Id.

Asserting that it had never “upheld a finding of

exceptionality based on a patentee’s bad-faith business

conduct toward an accused infringer prior to litigation,” it

declined “to expand the scope of the statutory term

‘exceptional’ in that manner.” Pet. App. 9a. The court of

appeals ignored the fact that it was, indeed, that “business

conduct” that led directly to the lawsuit. It found that because

Abbott’s suit was not frivolous, it could not be “exceptional”

on the basis of bad faith, notwithstanding that “bad faith” and

“frivolous suit” are separate grounds for “exceptionality.” *

REASONS FOR GRANTING THE PETITION

This petition presents an important question of statutory

interpretation that relates to the district court’s ability in its

discretion to punish misconduct, prevent injustice, and to

make whole the party subjected to the bad-faith pre-litigation

conduct. The court of appeals’ new bright-line definition of

“exceptional case” limits the district courts’ exercise of

discretion provided in the broad terms of § 285 as explained

in the statutory history. That decision undermines the words

of the statute, the clear legislative history, and decades of

interpretation by the federal courts, all of which place the

determination of “exceptionality” in the discretion of the

district court on a case-by-case basis.

This Court has cautioned the court of appeals against

too strongly favoring the clarity of new “bright-line” rules

in nettlesome patent questions where Congressional intent

and long-standing controlling precedent command that

the question be left to the discretion of the district court. *

2. Similarly, in McNeil, 337 F.3d at 1372, the court of appeals

reversed an award of attorney fees based on the patentee’s pre-

litigation misconduct in procuring patents because “[w]e have not

previously held [a patentee] liable for attorney fees. . . in the absence

of clear and convincing evidence of inequitable conduct [before the

PTO] or misconduct during litigation. We decline Perrigo’s invitation

to do so on these facts.”

3. For example, in Festo Corp. v. Shoketsu Kinzoku Kogyo

Kabushiki Co., 535 U.S. 722, 730 (2002), the court of appeals

(Cont'd)

The court of appeals’ decision also is inconsistent with the

decisions interpreting the attorney fee shifting provisions in

other areas of intellectual property, such as trademark, which

as this Court has explained, is closely related to the patent

attorney fee provision.

1. The statutory provision and its legislative history

provide district courts with discretion to determine if a patent

case is “exceptional” and thereby warrants an award of

attorney fees. Section 285 provides that “[t]he court in

exceptional cases may award reasonable attorney fees to the

prevailing party.” “Exceptional case” is not further defined

by Congress in the statute. Thus, the statute leaves the district

court to determine in its discretion “exceptionality” and the

subsequent awarding of attorney fees based on a case-by-

case analysis of the losing party’s misconduct.

The legislative history makes plain that “exceptionality”

is to be determined by the district court — the court that has

the opportunity to hear the evidence of the misconduct.

The 1946 Patent Act added a punitive fee compensation

provision to the patent law for the first time. Patent Rights —

Protection, S. Rep. No. 79-1503 (June 14, 1946), reprinted

(Cont'd)

concluded that the flexible-bar rule for determining when prosecution

history estoppel foreclosed a patentee’s claim of equivalents “should

be overruled because this case-by-case approach has proved

unworkable.” The court of appeals believed that its new complete-

bar rule “would promote certainty in the determination of

infringement cases.” /d. This Court reversed despite acknowledging

that the new “bright-line rule. . . would have provided more certainty

in determining when estoppel applies.” Jd. at 739. It held “that the

doctrine of equivalents and the rule of prosecution historyestoppel

are settled law” and, therefore, “[t]he responsibility for changing

them rests with Congress.” Jd.

———————————— l OOO

in 1946 U.S.C.C.A.N. 1386-87; compare Patent Rights —

Protection, ch. 726, Pub. L. No. 79-587 (Aug. 1, 1946),

reprinted in 1946 U.S.C.C.A.N. 744, with 35 U.S.C. § 70

(1929). Then 35 U.S.C. § 70 provided that “(t]he court may

in its discretion award reasonable attorney’s fees to the

prevailing party upon the entry of judgment on any patent

case.” Patent Rights — Protection, ch. 726, Pub. L. No. 79-

587 (Aug. 1, 1946), reprinted in 1946 U.S.C.C.A.N. 744;

35 U.S.C. § 70 (1951). When the attorney fee provision was

codified in its current form in the 1952 Act, the term

“in exceptional cases” was substituted for “in its discretion.”

35 U.S.C. § 285 (1954). The Revised Note states, however,

that § 285 “is substantially the same as the corresponding

provision in R.S. 4921 [the earlier 1946 provision]; ‘in

exceptional cases’ has been added as expressing the intention

of the present statute as shown by its legislative history and

as interpreted by the courts.” 35 U.S.C. § 285, Revision Note,

reprinted in 1952 U.S.C.C.A.N. 2403, 2423.

The 1946 Note of the Senate Committee on Patents

explains that “the provision relating to attorney’s fees is made

discretionary with the court.” Patent Rights — Protection,

S. Rep. No. 79-1503 (June 14, 1946), reprinted in 1946

U.S.C.C.A.N. 1387. The Committee explained that

the discretion given the court in this respect...

will discourage infringement of a patent by anyone

thinking that all he would be required to pay if he

loses the suit would be a royalty. The provision is

also made general so as to enable the court to

prevent a gross injustice to an alleged infringer.

Id. Thus, the substitution of “in exceptional cases” for

“in its discretion” in 1952 did not in any way limit the

discretion of the district court to determine “exceptionality”

on a case-by-case basis.

Moreover, since the compensatory and punitive attorney

fee provision entered the patent law in 1946, federal courts

have held that it is to be implemented at the discretion of the

trial court. In Rohm & Haas Co. v. Crystal Chem. Co., 736

F.2d 688, 691 (Fed Cir. 1984), the court of appeals explained

that “[s]ubsequent to the 1946 amendments, attorney fee

awards were granted by the courts, in their discretion,

primarily upon findings of extraordinary circumstances.”

Despite the fact that “the Patent Act of 1952, [which] codified

the attorney fee provision in 35 U.S.C. § 285,... omits

explicit reference to the court’s discretion . . . [c]ases decided

under § 285 have noted that ‘the substitution of the

phrase “in exceptional cases” has not done away with

the discretionary feature.’” Jd. (quoting Hoge Warren

Zimmermann Co. v. Nourse & Co., 293 F.2d 779, 783

(6" Cir. 1961)).?

At least one early case decided the specific question at

issue here, determining that it is within the discretion of a

district court to award attorney fees for pre-litigation

misconduct. In Brennan v. Hawley Prods. Co., 98 F. Supp.

369, 370(N.D. Ill. 1951), the court barred an action for patent

infringement because of laches and the defendant received

an allowance of attorney fees. The trial court’s laches decision

4. See also L.A. Gear, Inc. v. Thom McAn Shoe Co., 988 F.2d

1117, 1128 (Fed. Cir. 1993) (remanded for a determination of whether

to award attorney fees to patentee because “[t]he trial judge is in the

best position to weigh the factors ‘that may contribute to a fair

allocation of the burdens of litigation as between winner and loser,’

in view of the entirety of the litigation circumstances”) (citation

omitted).

———————

—————— Nnn>>n

was affirmed by the court of appeals and certiorari was denied

by this Court. /d. The defendant sought an allowance of fees

for legal services rendered on appeal. /d. The court granted

the requested attorney fees because “the record shows not

only a long delay on the part of the plaintiff in instituting

litigation on his claims of infringement, but also such a

change in the condition of the defendant that it would be

inequitable to allow plaintiff to enforce his claim for

infringement.” Jd. The court explained that making such an

award was “‘in its discretion’ ... where one party has been

guilty of some inequitable or unconscionable conduct.” Jd.

(citation omitted). That the bad-faith laches misconduct was

“pre-litigation” was of no consequence.

2. The court of appeals ignored that the statutory

provision and its legislative history afford the district courts

~ with discretion to determine “exceptionality.”’ The court of

appeals said nothing about the Congressional intent that

attorney fees be awarded at the discretion of the district court.

Instead, the court of appeals cited its own precedent for

the limiting proposition that “[w]e have repeatedly identified

as ‘exceptional’ those cases involving ‘inequitable conduct

before the [Patent Office]; litigation misconduct; vexatious,

unjustified, and otherwise bad faith litigation; a frivolous

suit or willful infringement.” Pet. App. 8a. Accordingly, it

concluded “that Abbott’s ‘equitable estoppel’ conduct was

not an appropriate basis for awarding attorney fees under

§ 285 and that the district court’s reliance on that ground

was legal error.” Pet. App. 9a.

The court of appeals did not even explain why awarding

attorney fees has often been deemed appropriate in other types

of pre-litigation conduct, such as inequitable conduct or

willful infringement.

————

None of the cases relied on by the court of appeals as

support for its new “bright-line” rule considered whether pre-

litigation misconduct may be a basis for awarding attorney

fees. In Cambridge Prods., Ltd. v. Penn Nutrients, Inc., 962

F.2d 1048, 1051 (Fed. Cir. 1992), the prevailing alleged

infringer was not entitled to attorney fees because its “bare

assertion in its initial brief of entitlement under § 285 is not

accompanied by any attempt at proving that this case is

exceptional.” In Hoffmann-La Roche Inc. v. Invamed Inc.,

213 F.3d 1359, 1365 (Fed. Cir. 2000), the court of appeals

affirmed the district court’s finding that the patentee “made

a reasonable pre-filing inquiry” and, therefore, had not

brought a frivolous suit. In Brasseler, U.S.A. I, L.P. v. Stryker

Sales Corp., 267 F.3d 1370 (Fed. Cir. 2001), the court of

appeals affirmed an award of attorney fees where the patentee

had engaged in inequitable conduct before the PTO.

In Yarway Corp. v. Eur-Control USA, Inc., 775 F.2d 268,

277 (Fed. Cir. 1985), the court of appeals reversed the district

court’s erroneous holding that alleged infringers had to pay

the patentee’s attorney fees because they “acted in bad faith

by attempting to invent around the patent which they had

licensed.” The court of appeals reiterated that “the incentive

to ‘design around’ patents is a positive result of the patent

system.” In other words, there was no misconduct at all.

Other decisions of the court of appeals make plain

that, until recently, there was no such “bright-line” rule.

In Cambridge Prods., 962 F.2d at 1050-51, and Brasseler,

267 F.3d at 1380 (emphasis added), it stated that “[iJn the

case of awards to prevailing accused infringers ...

‘exceptional cases’ are normally those of bad faith litigation

or those involving fraud or inequitable conduct by the

patentee in procuring the patent.” In Hoffmann-La Roche,

213 F.3d at 1365 (emphasis added; citation omitted), it stated

that “‘/a/mong the types of conduct which can form a basis

for finding a case exceptional are willful infringement,

inequitable conduct before the P.T.O., misconduct during

litigation, vexatious or unjustified litigation, and frivolous

suit.””

Moreover, unlike this case, the cases relied on by the

court of appeals frequently start their analysis with an

acknowledgement that “[t]he award of attorney fees under

§ 285 is within the discretion of the court.” Cambridge

Prods., 962 F.2d at 1050; Yarway Corp., 775 F.2d at 277

(Section 285 “provide[s] the authority for the district court

to act under its discretion” as long as “the exercise of

discretion not be in conflict with the policies of the Patent

Act”).

3. The court of appeals reformulated the district court's

discretion to award attorney fees by instituting its new

“bright-line” rule as the “proper legal standard under

§ 285” and reviewing de novo the district court's application

of it. The court of appeals’ decision interferes with the district

court’s exercise of discretion by combining its new “bright-

line” rule to its previous statements that it must review the

legal application of § 285 de novo. Specifically, the court of

appeals refused to consider bad-faith pre-litigation conduct

as a basis for attorney fees. Thus, the court of appeals has

changed the first step in its standard of review — it must

“review de novo whether the [district] court applied the

proper legal standard under § 285” — by sua sponte

eliminating an entire class of conduct from the analysis.

Pet. App. 5a. As a practical matter, the court of appeals has

given itself de novo authority to determine whether the district

court followed its new “bright-line” rule.

Here, by reviewing the application of its new rule

de novo, the court of appeals determined that the district court

committed “legal error.” Pet. App. 9a. In doing so, the court

of appeals never reached the real issues of whether the district

court’s factual findings on which it based a conclusion

that Abbott’s estoppel misconduct rendered the case

“exceptional” were clear error or whether the district court’s

award of attorney fees based on its factual findings was an

abuse of discretion. By adopting this legal standard that it

reviews de novo, the court of appeals has given itself a vehicle

with which to substitute its own judgment regarding the

award of attorney fees for that of district courts — which it

did in this case.

4. Federal district courts exercise their discretion to

determine whether a trademark case is “exceptional” and

thereby warrants an award of attorney fees; instances of pre-

litigation misconduct are considered in determining the

“exceptionality” of trademark cases. Like the Patent Act,

the Lanham Act provides that “[t]he court in exceptional cases

may award reasonable attorney fees to the prevailing party”

in a trademark action. 15 U.S.C. § 1117(a). This Court has

recognized that the fee shifting provision in the patent law is

closely related to that in trademark. Fogerty v. Fantasy, Inc.,

510 U.S. 517, 525 n.12 (1994). Like the patent provision,

the determination of an “exceptional” case is left to the

district court’s discretion. Aromatique, Inc. Vv. Gold Seal, Inc.,

28 F.3d 863, 876 (8th Cir. 1994). Federal courts “have defined

the characteristics of exceptional cases with adjectives

suggesting egregious conduct by a party,” e.g., “groundless,

unreasonable, vexatious, or pursued in bad faith.” /d. at 877.

Such conduct is not limited to specifically identified

circumstances, but rather is “one in which one party’s

behavior went beyond the pale of, acceptable conduct.”

Id. Pre-litigation misconduct may lead to a finding of

exceptionality. In Aromatique, the court of appeals reversed

a holding of trademark infringement and awarded attorney

fees to the alleged infringer because the plaintiff, among other

things, twice wrote the alleged infringer prior to litigation

alleging infringement and falsely asserting that the plaintiff’s

trade dress was federally registered. 28 F.3d at 878. The court

of appeals held that “(t]his record compels the conclusion

that [the alleged infringer] has shown that [the plaintiff’s]

conduct was exceptional within the meaning of Section 35

of the Lanham Act.” Jd. at 879.

5. The court of appeals’ decision is inconsistent with

its own rule; “bad faith” is different from “frivolous suit”

or “vexatious litigation.” The court of appeals’ bright-line

rule identifies, in part, “litigation misconduct; vexatious,

unjustified, and otherwise bad faith litigation; [and] a

frivolous suit” as conduct that “repeatedly” rendered a case

“exceptional.” Pet. App. 8a (emphasis added). The court

of appeals’ bright-line rule conflates the rule itself by

making “bad faith” mean the same thing as “misconduct

during litigation,” “frivolous suit” and “vexatious litigation.”

For example, the court of appeals states that “[a]lthough a

lawsuit pursued in bad faith is a sufficient basis for imposing

attorney fees under § 285, such bad faith requires not

misleading pre-litigation conduct, but vexatious, unjustified,

or frivolous litigation.” Pet App. 10a. This ignores that the

plain meaning of otherwise bad-faith conduct encompasses

more than litigation misconduct or bringing a frivolous suit.

It also is contradicted by the court of appeals’ analysis of

whether Abbott’s suit was frivolous in which it acknowledges

that the bad faith equitable estoppel events are separate and

apart from a consideration of whether the suit was frivolous.

Pet. App. 10a-11a (“The record, however, does not support

the district court’s finding that Abbott maintained its

infringement counterclaim in bad faith. Even if Abbott

had knowledge of the events that would ultimately lead to a

holding of equitable estoppel, its litigation position was not

frivolous or baseless.”).

The plain words of the statute and the legislative history

show that “bad faith” should be interpreted to mean all

dealings between the parties that relates to the litigation. Here,

the court of appeals did not reverse a single one of the district

court’s numerous fact findings in support of its conclusion

that Abbott’s “equitable estoppel” business conduct was in

bad faith and that Abbott provided no evidence of good faith.

Rather, the court of appeals legislated a change to the statute

to prevent recovery of attorney fees in cases of bad-faith pre-

litigation conduct.

CONCLUSION

The petition for a writ of certiorari should be granted.

Congress, in 35 U.S.C. § 285, gave discretionary authority

to the district courts to award attorney fees in “exceptional”

patent cases to prevent a gross injustice to an abused party.

The court of appeals, however, through its new bright-line

rule defining the legal standard of § 285 and de novo review

of the district courts’ application of it, has removed the

discretion of the district court and decided the specific

circumstances under which attorney fees may be awarded.

Its bright-line rule also has undone the distinction between

“bad-faith” misconduct and bringing a “frivolous suit.” Here,

this has resulted in a fundamentally unfair result. The district

court, which was in the best position to determine if

respondent’s conduct rendered the case “exceptional” after

adjudicating years of litigation and a four-month trial,

exercised its discretion to award fees to petitioners to

compensate them for their substantial and unjustified loss

incurred in successfully defending this suit. That

compensation has now been taken from them because of

second-guessing by the court of appeals.

Respectfully submitted,

HERBERT F. SCHWARTZ

Counsel of Record

KENNETH B. HERMAN

FisH & NEAVE

1251 Avenue of the Americas

New York, New York 10020

(212) 596-9000

Attorneys for Petitioners

APPENDIX

eR Nett aE, oA RATE MRR dos

APPENDIX A — OPINION OF THE UNITED STATES

COURT OF APPEALS FOR THE FEDERAL

CIRCUIT FILED AUGUST 7, 2003

UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

03-1067

FOREST LABORATORIES, INC. AND ONY, INC.,

Plaintiffs-Appellees,

ABBOTT LABORATORIES,

Defendant-Appellant,

and

TOKYO TANABE COMPANY, LTD.,

Defendant.

DECIDED: August 7, 2003

Before LOURIE, RADER, and DYK, Circuit Judges.

LOURIE, Circuit Judge.

Abbott Laboratories appeals from the decision of the

United States District Court for the Western District of

- New York awarding attorney fees and expenses to ONY, Inc.

Appendix A

and Forest Laboratories, Inc. based on Abbott’s conduct that

led to a holding of equitable estoppel. Forest Labs., Inc. v.

Abbott Labs., No. 96-CV-159A (W.D.N.Y. Sept. 4, 2001)

(“Forest IV’). Because we conclude that the court erred in

finding this case to be “exceptional” under 35 U.S.C. § 285,

we reverse.

BACKGROUND

Tokyo Tanabe Company, Ltd. owns U.S. Patents

4,338,301 and 4,397,839, which are directed to a lung

surfactant composition for treating respiratory distress

syndrome in premature babies. Pursuant to an exclusive

license of the ’301 and °839 patents, Abbott developed a

commercial product known as Survanta® in the 1980s. At

about the same time, ONY developed its own product. for

treating neonatal respiratory distress syndrome called Calf

Lung Surfactant Extract (“CLSE”). In June 1991, ONY

entered into an agreement with Forest for Forest to further

develop and market CLSE under the trade name Infasurf®.

From 1983 until 1991, Abbott and ONY maintained

contact regarding the development of CLSE. Abbott met with

ONY in November 1983 to discuss the development,

composition, and testing of CLSE, and later informed ONY

that it had opted to develop the Tanabe product instead of

CLSE because the Tanabe product had patent protection. In

April 1984, at Abbott’s request, ONY submitted a

memorandum of invention to Abbott disclosing “everything

known about CLSE” for Abbott to conduct a patentability

search. Upon completion of the search, Abbott informed ONY

that CLSE was likely not patentable in light of two “pertinent

the

Lin

Appendix A

references,” but did not mention the °301 and ’839 patents;

nonetheless, Abbott encouraged ONY that it “look[ed]

forward to working with [ONY] in the future.” In April 1986,

Abbott again met with ONY to discuss the possibility of joint

development of CLSE and suggested that “some future

collaboration” might still be possible. Abbott continued to

monitor the development of CLSE until 1991, while

internally expressing concern that ONY might receive FDA

approval for CLSE before Abbott could do so for Survanta®.

In July 1991, Abbott received both FDA approval and

orphan drug status (providing seven years’ market

exclusivity) for Survanta®, which it then proceeded to market.

Several years later, Abbott informed ONY and Forest that it

had reason to believe that Infasurf® would infringe the °301

and °839 patents if it were to be marketed. Nonetheless, in

March 1995, ONY filed a new drug application for approval

to market Infasurf®. The FDA then notified ONY that

Infasurf® was the “same drug” as Survanta® under the Orphan

Drug Act, 21 U.S.C. 88 360aa-360dd (1994), and that it

therefore could not be approved for sale until Abbott's period

of exclusivity expired in July 1998.

In light of Abbott’s June 1994 letter claiming

infringement and the FDA’s notification that Infasurf® and

Survanta® were the “same drug,” ONY and Forest sued

Abbott and Tanabe in the U.S. District Court for the Western

District of New York, seeking a declaratory judgment of

noninfringement and invalidity of the °301 and ’839 patents.

Abbott and Tanabe counterclaimed for infringement. A jury

found both patents infringed and not invalid and, in an

advisory verdict, rejected ONY and Forest’s defense of

Appendix A

equitable estoppel. The district court, however, granted ONY

and Forest a judgment of noninfringement as a matter of law

(“JMOL”) on the ground that Abbott and Tanabe had failed

to present any evidence at trial to show that CLSE met the

water content limitations of the patents in suit either literally

or under the doctrine of equivalents. Forest Labs., Inc. v.

Abbott Labs., No. 96-CV-159A, 1999 U.S. Dist. LEXIS

23217, at *20-21 (W.D.N.Y. June 23, 1999) (“Forest I’). In

a separate opinion, the court also ruled that Abbott, and

Tanabe by imputation, was equitably estopped from asserting

infringement of the ’301 and ’839 patents against ONY and

Forest because: (1) Abbott, in bad faith, misled ONY and -~

Forest to believe that it would not assert infringement by

encouraging their development of Infasurf® and by neglecting

its duty to inform them of any possible infringement;

(2) ONY and Forest reasonably relied on Abbott’s misleading

conduct; and (3) ONY and Forest would suffer economic

and evidentiary prejudice if Abbott were permitted to proceed

with its infringement counterclaim. Forest Labs., Inc. v.

Abbott Labs., No. 96-CV-159A, 1999 U.S. Dist. LEXIS

23215, at *25-26 (W.D.N.Y. June 23, 1999) (“Forest IT’).

On appeal, we affirmed the JMOL of noninfringement and,

having done so, declined to consider the equitable estoppel

issue. Forest Labs., Inc. v. Abbott Labs., 239 F.3d 1305, 1314

(Fed. Cir. 2001) (“Forest IT’).

The district court subsequently granted ONY and Forest’s

motion for attorney fees and expenses against Abbott, but

not Tanabe. The court found the case to be “exceptional”

under 35 U.S.C. § 285 because Abbott, in bad faith,

encouraged ONY to develop CLSE, disregarded its duty to

advise ONY and Forest of possible infringement, and pursued

Appendix A

its infringement counterclaim with a “reckless disregard for

the facts in an attempt to prevent Infasurf from reaching the

market.” Forest IV, slip op. at 12. In so finding, the court

rejected Abbott’s argument that fees could not be awarded

for bad-faith conduct that occurred prior to litigation and

held that, in any event, Abbott had acted in bad faith during

litigation by bringing suit with knowledge of its prior bad-

faith conduct toward ONY and Forest. /d. at 11. Having found

the case to be exceptional, the court then chose to exercise

its discretion and award attorney fees in order to avoid a

“sross injustice” and to deter patentees from similar bad-

faith conduct in the future. Jd. at 15. Upon the parties’

stipulation as to the amount of any fee award, the court

entered an award against Abbott of $6.5 million in attorney

fees and expenses. Forest Labs., Inc. v. Abbott Labs., No.

96-CV-159A (W.D.N.Y. Sept. 30, 2002).

Abbott timely appealed the fee award to this court. We

have jurisdiction pursuant to 28 U.S.C. § 1295(a)(1).

DISCUSSION

A determination whether to award attorney fees under

35 U.S.C. § 285 involves a two-step process. First, a district

court must determine whether the prevailing party has proved

by clear and convincing evidence, Ruiz v. A.B. Chance Co.,

134 F.3d 654, 669 (Fed. Cir. 2000), that the case iS

“exceptional.” 35 U.S.C. § 285 (2000); Cybor Corp. v. FAS

Techs., 138 F.3d 1448, 1460 (Fed. Cir. 1998) (en banc). We

review de novo whether the court applied the proper legal

standard under § 285, and we review the court’s factual

findings, including whether the case is exceptional, for clear

Appendix A

error. Brasseler, U.S.A. I, L.P. v. Stryker'Sales Corp.,

267 F.3d 1370, 1378 (Fed. Cir. 2001). A finding is clearly

erroneous when, despite some supporting evidence, “the

reviewing court on the entire evidence is left with the definite

and firm conviction that a mistake has been committed.”

United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948).

Second, if the district court finds the case to be exceptional,

it must then determine whether an award of attorney fees is

appropriate. Cybor Corp., 138 F.3d at 1460. We review that

determination for an abuse of discretion. /d. A district court

abuses its discretion when “its decision is based on clearly

‘erroneous findings of fact, is based on erroneous

interpretations of the law, or is clearly unreasonable, arbitrary

or fanciful.” Jd. (citation omitted).

On appeal, Abbott first argues that the district court

improperly found this case to be exceptional. Abbott contends

that the court’s underlying determination of equitable

estoppel was clear error and, in any event, was based on only

a preponderance of the evidence, whereas a finding that a

case is exceptional under § 285 requires clear and convincing

evidence. Abbott also argues that its private pre-litigation

conduct was an inappropriate ground on which to base a

finding of exceptionality and that it did not engage in bad-

faith conduct during litigation because its legal position was

neither frivolous nor baseless. Abbott further maintains that

the district court’s decision to award attorney fees was an

abuse of discretion in light of the court’s erroneous, or at

least debatable, holding of equitable estoppel; the absence

of any allegation of litigation misconduct; and the jury’s

advisory rejection of ONY and Forest’s equitable estoppel

defense. Finally, Abbott argues that the fee award serves

ORO, UNE Gee io Gn ee Paes

Appendix A

neither of the intended purposes of § 285 in that it does not

deter unwarranted infringement claims or prevent injustice

to those falsely accused of infringement.

ONY and Forest respond that the district court properly

found that Abbott’s bad-faith conduct, viz., its failure to raise

the issue of infringement with ONY and Forest between 1983

and 1994, while encouraging the development of Infasurf®

as an alternative until it received FDA approval for Survanta®,

makes this case exceptional. They point out that the court

did not need to find by clear and convincing evidence that

the elements of an equitable estoppel defense were proved,

but only that this case was exceptional. ONY and Forest also

maintain that a finding of exceptionality was appropriate

because Abbott should have recognized that its pre-litigation

conduct precluded it from bringing suit. They further argue

that Abbott’s bad-faith conduct continued during litigation

because Abbott persisted with its counterclaim of

infringement in complete disregard of its history of dealings

with ONY and Forest. In addition, ONY and Forest contend

that Abbott’s failure to offer any evidence of infringement

with respect to the water content limitations of the asserted

patents renders this case exceptional. Finally, ONY and Forest

argue that the district court did not abuse its discretion in

awarding fees in this case because, as the court explained,

the holding of equitable estoppel alone did not make ONY

and Forest whole, and not awarding fees could encourage

other patentees that have engaged in similar bad-faith conduct

to bring unwarranted infringement claims.

We agree with Abbott that the district court erred in

awarding attorney fees to ONY and Forest. Section 285

Appendix A

provides that a “court in exceptional cases may award

reasonable attorney fees to the prevailing party.” 35 U.S.C.

§ 285 (2000). We have repeatedly identified as “exceptional”

those cases involving “inequitable conduct before the [Patent

Office]; litigation misconduct; vexatious, unjustified, and

otherwise bad faith litigation; a frivolous suit or willful

infringement.” Brasseler, 267 F.3d at 1380 (citation omitted);

e.g., Hoffman-La Roche Inc. v. Invamed Inc., 213 F.3d 1359,

1365 (Fed. Cir. 2000). None of those circumstances is present

here, yet the district court found that this case was exceptional

due to Abbott’s bad-faith conduct which led to a holding of

equitable estoppel. Forest IV, slip op. at 9-H. We disagree

with the court’s expansive reading of § 285.

In interpreting § 285, we have been mindful of the limited

circumstances in which an award of attorney fees is

appropriate. See Mach. Corp. of Am. v. Gulifiber AB, 774

F.2d 467, 472 (Fed. Cir. 1985). The Senate Report

accompanying § 285’s predecessor statute, which is

applicable to the present statute as well, states that “‘[i]t is

not contemplated that the recovery of attorney’s fees will

become an ordinary thing in patent suits.’” Rohm & Haas

Co. v. Crystal Chem. Co., 736 F.2d 688, 690-91 (Fed. Cir.

1984) (quoting S. Rep. No. 79-1503 (1946)). Indeed, we have

recognized that § 285 is an exception to the American Rule

and a change to the pre-1946 practice of not awarding

attorney fees based upon equitable considerations in patent

cases. Jd. at 690. In the context of fee awards to prevailing

accused infringers, we have observed that § 285 is limited to

circumstances in which it is necessary to prevent “a gross

injustice” to the accused infringer, see Mach. Corp., 774 F.2d

at 472 (quoting S. Rep. No. 79-1503 (1946)), and have upheld

Appendix A

findings of exceptionality to prevent such an injustice only

when the patentee has procured its patent in bad faith (7.e.,

committed inequitable conduct before the Patent Office) or

has litigated its claim of infringement in bad faith.

See Cambridge Prods., Ltd. v. Penn Nutrients, Inc., 962

F.2d 1048, 1050-51 (Fed. Cir. 1992); Mach. Corp., 774 F.2d

at 472.

We have not, however, upheld a finding of exceptionality

based on a patentee’s bad-faith business conduct toward an

accused infringer prior to litigation, and we decline to expand

the scope of the statutory term “exceptional” in that manner.

Cf. Yarway Corp. Vv. Eur-Control USA, Inc., 775 F.2d 268,

277-78 (Fed. Cir. 1985) (reversing a finding of exceptionality

premised on an accused infringer’s bad-faith conduct of

attempting to design around a patent in order to circumvent

a license agreement). Equitable estoppel may be imposed in

a patent case when a patentee induces another party to believe

that it will not sue that party for infringement. A.C. Aukerman

Co. v. R.L. Chaides Constr. Co., 960 F.2d 1020, 1042 (Fed.

Cir. 1992) (en banc). Reliance by the other pafty as well as

prejudice are required in order to estop the patentee from

later suing. Jd. at 1042-43. The consequence of estoppel is

loss of the cause of action, id. at 1028, and we have not

extended the consequences to include attorney fees under

the rubric of exceptional case. Such business conduct, even

though sufficiently relied upon and prejudicial to lead to

estoppel, does not make any subsequent lawsuit exceptional.

Accordingly, we conclude that Abbot’s “equitable estoppel”

conduct was not an appropriate basis for awarding attorney

fees under § 285 and that the district court’s reliance on that

ground was legal error.

10a

Appendix A

We also agree with Abbott that the district court clearly

erred in finding that Abbott engaged in bad-faith litigation.

Although a lawsuit pursued in bad faith is a sufficient basis

for imposing attorney fees under § 285, such bad faith

requires not misleading pre-litigation conduct, but vexatious,

unjustified, or frivolous litigation. See, e.g., Aptix Corp. v.

Quickturn Design Sys., Inc., 269 F.3d 1369, 1375 (Fed. Cir.

2001) (affirming an award of attorney fees under § 285 for

the “extreme litigation misconduct” of falsifying evidence);

Eltech Sys. Corp. v. PPG Indus., Inc., 903 F.2d 805, 810-11

(Fed. Cir. 1990) (affirming an award of attorney fees under

§ 285 for pursuing a baseless claim of infringement). There

is no suggestion that Abbott engaged in vexatious litigation

tactics; the pertinent inquiry is thus whether Abbott knew or

should have known that it would be estopped from asserting

the °301 and ’839 patents against ONY and Forest, but

pursued its infringement counterclaim anyway. See Haynes

Int'l Inc. v. Jessop Steel Co., 8 F.3d 1573, 1579 (Fed. Cir.

1993) (“A frivolous infringement suit is one which the

patentee knew or, on reasonable investigation, should have

known, was baseless.’’), reh'g granted on other grounds, 15

F.3d 1076 (1994). The district court answered that question

in the affirmative, observing that Abbott “obviously knew

of its own bad faith conduct prior to the commencement of

the lawsuit,” Forest IV, slip op. at 11, and nevertheless

pursued its infringement counterclaim with a “reckless

disregard” for the facts of the case and the validity of ONY

and Forest’s equitable estoppel defense, id. at 12.

The record, however, does not support the district court’s

findings that Abbott maintained its infringement counterclaim

in bad faith. Even if Abbott had knowledge of the events

‘|

;

lla

Appendix A

that would ultimately lead to a holding of equitable estoppel,

its litigation position was not frivolous or baseless. Indeed,

based on the facts of this case, it was far from a foregone

conclusion that ONY and Forest would be able to establish

their equitable estoppel defense successfully. Abbott never

expressly communicated to Forest or ONY that it did not

intend to enforce its patents; instead, the district court had

to infer a misleading statement from Abbot's conduct and

did so only after finding that Abbott had a duty to advise

ONY and Forest of any possible infringement when it

provided ONY with a patentability opinion. See ABB

Robotics, Inc. v. GMFanuc Robotics Corp., 52 F.3d 1062,

1063 (Fed. Cir. 1995); see also A.C. Aukerman Co., 960 F.2d

at 1041 (“[E]quitable estoppel is not limited to a particular

factual situation nor subject to resolution by simple or hard

and fast rules.”). Although the equitable estoppel issue 1s

not before us, we note that it was never finally resolved, for

we declined to consider Abbott’s appeal of that issue when

we affirmed the JMOL of noninfringement. Forest III, 239

F.3d at 1314. Once it had been concluded that ONY and

Forest were not infringing the Abbott-Tanabe patents,

whether Abbott would be estopped from enforcing those

patents against ONY and Forest became moot. In any event,

we cannot even say with confidence that the equitable

estoppel determination would have been affirmed had we

reached the issue on appeal. Moreover, the district court’s

denial of ONY and Forest’s motion for JMOL at the close of

the evidence and the jury’s advisory verdict of no equitable

estoppel suggest that Abbott’s position was not baseless.

In light of these considerations, we conclude that Abbott’s

litigation position with respect to the equitable estoppel issue

cannot be characterized as clearly and convincingly

12a

Appendix A

vexatious, unjustified, or frivolous. Accordingly, the district

court’s finding that Abboti engaged in bad-faith litigation

was Clearly erroneous.

Finally, we reject ONY and Forest’s argument that an

award of attorney fees is appropriate because Abbott failed

to offer any evidence of infringement regarding the water

content limitations of the asserted patents. Although Abbott

ultimately lost its infringement counterclaim on that ground,

id., we cannot say that such a lack of proof is clear and

convincing evidence that Abbott, acting in bad faith, asserted

a baseless or frivolous counterclaim of infringement. Indeed,

the jury’s finding of infringement suggests otherwise.

Moreover, the district court expressly disclaimed reliance on

Abbott’s failure to prove infringement as a basis for imposing

attorney fees, noting that Abbott presented “plausible yet

untenable arguments regarding claim construction and the

doctrine of equivalents.” Forest IV, slip op. at 16-17. Thus,

even if Abbott’s lack of evidence of infringement could

support a findings exceptionality under § 285, the district

court did not abuse its discretion in choosing not to award

fees on that ground.

CONCLUSION

For the foregoing reasons, we conclude that the district

court erred in finding this case to be “exceptional” under

35 U.S.C. § 285 based on Abbott’s pre-litigation conduct

toward ONY and Forest. Accordingly, the decision of the

district court is

REVERSED.

ety Sand <a : , a a” 2

LORS RO Seer er eT Oe RE SCE

13a

APPENDIX B — DECISION AND ORDER OF THE

UNITED STATES DISTRICT COURT FOR THE

WESTERN DISTRICT OF NEW YORK

FILED SEPTEMBER 30, 2002

UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF NEW YORK

96-CV-159A

FOREST LABORATORIES, INC. and ONY, INC.,

Plaintiffs,

ABBOTT LABORATORIES and

TOKYO TANABE COMPANY, LTD.,

Defendants.

DECISION AND ORDER

On September 4, 2001, this Court issued a Decision and

Order in this case granting the motion of plaintiffs Forest

Laboratories, Inc. (“Forest”) and ONY, Inc. (“ONY”) for

attorneys’ fees, pursuant to 35 U.S.C. § 285, against

defendant Abbott Laboratories (“Abbott”). The Court denied

the motion with respect to defendant Tokyo Tanabe Company,

Ltd. The Court also appointed Michael R. McGee, Esq.,

pursuant to Rule 53 of the Federal Rules of Civil Procedure,

as Special Master to hear and report on the reasonable amount

of attorneys’ fees and expenses that Abbott should pay,

14a

Appendix B

defendants’ objections to the plaintiffs’ bill of costs, the

amount of prejudgment and/or post-judgment interest and

any other related issues.

On September 6, 2002, the Special Master filed a Report

and Recommendation, informing the Court that the parties

had entered into Joint Stipulation Regarding the Amount of

Fees and Expenses (“Joint Stipulation’’). The Special Master

finds that the Joint Stipulation is a reasonable resolution of

all the issues referred to the Special Master by the Court’s

September 4, 2001 Decision and Order.

There being no timely objections filed to the Special

Master’s Report and Recommendation, the Court hereby

adopts the Report and Recommendation in all respects,

pursuant to Rule 53(e)(2). Pursuant to Rules 54(d)(2)(C)

and 58 of the Federal Rules of Civil Procedure, the Court

hereby orders the Clerk of Court to enter judgment in favor

of Forest and ONY consistent with the Court’s September 4,

2001 Decision and Order, this Decision and Order, the Special

Master’s Report and Recommendation and the Joint

Stipulation, and to take all steps necessary to close the case.

The Court commends the Special Master on assisting

the parties in reaching an agreeable resolution to these

complex issues and thanks him for a job well done.

IT IS SO ORDERED.

s/ Richard J. Arcara

HONORABLE RICHARD J. ARCARA

UNITED STATES DISTRICT COURT

Dated: September 30, 2002.

SUR TES

15a

APPENDIX C — DECISION AND ORDER OF THE

UNITED STATES DISTRICT COURT FOR THE

WESTERN DISTRICT OF NEW YORK

FILED SEPTEMBER 4, 2001

UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF NEW YORK

96-CV-159A

FOREST LABORATORIES, INC. AND ONY, INC.,

Plaintiffs,

ABBOTT LABORATORIES AND

TOKYO TANABE COMPANY, LTD.,

Defendants.

DECISION AND ORDER

INTRODUCTION

Currently before the Court is the motion of plaintiffs,

Forest Laboratories, Inc. (“Forest”) and ONY, Inc. (“ONY”),

for an award of attorneys’ fees and expenses, pursuant to

35 U.S.C. § 285, against defendants Abbott Laboratories

(“Abbott”) and Tokyo Tanabe Company, Ltd. (“Tokyo

Tanabe”).! By Order filed July 20, 1999, the Court ordered

1. Plaintiffs have also submitted a Bill of Costs pursuant to Local

Rule 54, Rule 54(d) of the Federal Rules of Civil Procedure 54(d),

and 28 U.S.C. § 1920. Defendants have filed objections to the

Bill of Costs.

16a

Appendix C

the parties to brief the issues of whether plaintiffs are entitled

to attorneys’ fees and expenses pursuant to § 285, and held

in abeyance the issue of whether the amount of attorneys’

fees and expenses requested by plaintiffs is reasonable. Oral

argument on the issue of whether plaintiffs are entitled to

attorneys’ fees and expenses was held on July 19, 2001.

After reviewing the submissions of the parties and

hearing argument from counsel, the Court grants plaintiffs’

motion for attorneys’ fees and expenses with regard to

defendant Abbott, but denies the motion with regard to

defendant Tokyo Tanabe.

BACKGROUND

Tokyo Tanabe is the assignee of U.S. Patents 4,338,301

and 4,397,839, which relate to a lung surfactant composition

for treating Respiratory Distress Syndrome (“RDS”) in

premature babies. Abbott developed a commercial product

known as “Survanta®” after receiving an exclusive U.S.

license to these patents from Tokyo Tanabe. ONY developed

a competing product for treating RDS, which it called

“Infasurf®.” ONY eventually entered into an agreement with

Forest under which Forest would further develop and market

Infasurf®. ONY and Abbott maintained collaborative contacts

throughout the development of these products from 1983 until

Abbott received FDA approval to market Survanta® in 1991,

during which time Abbott never gave ONY any reason to

believe that its Infasurf® product would infringe any patents

of Abbott. In fact, Abbott performed a patentability search

for ONY in 1984 and never mentioned the Tokyo Tanabe

patents under which Abbott was exclusively licensed.

17a

Appendix C

However, in 1994, Abbott informed ONY that it had reason

to believe that Infasurf® might infringe the Tokyo Tanabe

patents.

In 1996, ONY and Forest sued Abbott, seeking a

declaratory judgment of non-infringement and patent -

invalidity. Abbott counterclaimed for infringement. After suit

was brought, ONY and Forest added Tokyo Tanabe as a

defendant, which also counterclaimed for infringement. ONY

and Forest later raised the additional defense of equitable

estoppel, alleging that Abbott had led ONY to believe that

Abbott would not assert the Tokyo Tanabe patents against it.

A jury returned a verdict in favor of Abbott and Tokyo

Tanabe on all issues except willfulness. The jury also returned

an advisory verdict in favor of Abbott on the issue of equitable

estoppel. ONY and Forest then moved for a post-trial

judgment of equitable estoppel and judgment as a matter of

law (“JMOL”) of non-infringement. The Court, stating that

it was not bound by the advisory verdict, applied equitable

estoppel after concluding that Abbott had misled ONY into

believing that it did not infringe the Tokyo Tanabe patents

and that ONY had relied on Abbot’s conduct and was

prejudiced by it. See Forest Labs. v. Abbott Labs., 1999

WL 33299123 (W.D.N.Y. Jun. 23, 1999) (“Equitable Estoppel

Decision”). The Court also granted ONY’s and Forest’s

motion for JMOL of non-infringement and its motion for a

conditional new trial, because it found that Abbott and Tokyo

Tanabe had failed to prove that CLSE (“Calf Lung Surfactant

Extract,” the “dry” form of Infasurf®) met the claim

limitatioris requiring specific water content percentages.

See Forest Labs. v. Abbott Labs., 1999 WL 33290607

18a

Appendix C

(W.D.N.Y. Jun. 23, 1999). Finally, the Court rejected

defendant’s claim of infringement under the doctrine of

equivalents for lack of evidence of equivalence. /d.

Abbott and Tokyo Tanabe appealed the Court’s judgment

applying equitable estoppel and its grant of JMOL of

non-infringement. The Federal Circuit Court of Appeals

affirmed the Court’s grant of JMOL of non-infringement,

agreeing that there was no proof that CLSE, based on its dry

weight, possessed the percentages of water claimed by the

patents. See Forest Labs. v. Abbott Labs., 239 F.3d 1305

(Fed. Cir. 2001).? Because it affirmed this Court decision on

the basis of its grant of JMOL of non-infringement, the

Federal Circuit did not decide the equitable estoppel issue.

DISCUSSION

A. Law Regarding § 285

Under 35 U.S.C. § 285, “[t]he court in exceptional cases

may award reasonable attorney fees to the prevailing party.”

The purpose of the statute is “‘to compensate the prevailing

party for its monetary outlays in the prosecution or defense

of the suit.’” Automated Business Cos. v. NEC Am., Inc., 202

F.3d 1353, 1355 (Fed. Cir. 2000) (quoting Central Soya Co.

v. Geo. A. Hormel & Co., 723 F.2d 1573, 1578 (Fed. Cir.

1983)). “In addition, § 285 serves as a deterrent to ‘improper

bringing of clearly unwarranted suits’ for patent

infringement.” Jd. (quoting Mathis v. Spears, 857 F.2d 749,

754 (Fed. Cir. 1988)).

2. The Court hereby incorporates by reference, and assumes

familiarity with, all of its prior decisions in this case. The Court also

assumes familiarity with the Federal Circuit’s decision.

19a

Appendix C

Whether to award attorneys’ fees under § 285 rests with

the sound discretion of the trial court. Modine Mfg. Co. v.

Allen Group, Inc., 917 F.2d 538, 543 (Fed. Cir. 1990),

cert. denied, 500 U.S. 918 (1991). Congress intended that

courts use their discretion under § 285 sparingly as the statute

is a departure from the usual “American rule” that counsel

fees are not awarded to the prevailing party in an action

at law. See Victus Ltd. v. Collezione Europa U.S.A., Inc.,

26 F. Supp. 2d 772, 787 (M.D.N.C. 1998) (citation omitted).

Thus, the payment of attorney’s fees for the victor

is not to be regarded as a penalty for failure to

win a patent infringement suit. The exercise of

discretion in favor of such an allowance should

be bottomed upon a finding of unfairness or bad

faith in the conduct of the losing party, or some

other equitable consideration of similar force,

which makes it grossly unjust that the winner of

the particular lawsuit be left to bear the burden

of his own counsel fees which prevailing litigants

normally bear.

Rohm & Haas Co. v. Crystal Chem. Co., 736 F.2d 688, 691

(Fed. Cir. 1984) (emphasis in original) (quoting Park-In-

Theaters, Inc. v. Perkins, 190 F.2d 137, 142 (9" Cir. 1951)).

Deciding a motion for attorneys’ fees under § 285

requires a two-step analysis. J.P. Stevens Co. v. Lex Tex Ltd.,

822 F.2d 1047, 1050 (Fed. Cir. 1987). The court “must

determine whether the case is ‘exceptional,’ if it is, then it is

within the court’s discretion to award attorneys’ fees to the

prevailing party. It is only after a specific finding of

20a

Appendix C

exceptional circumstances has been made that the discretion

to award attorneys’ fees can be exercised.” Jd. (citations

omitted).

The determination that a case is “exceptional” is a factual

one and should be made in light of the totality of the

circumstances. See Interspiro USA, Inc. v. Figgie Int'l Inc.,

18 F.3d 927, 933 (Fed. Cir. 1994); L.A. Gear, Inc. v. Thom

McAn Shoe Co., 988 F.2d 1117, 1128 (Fed. Cir.), cert. denied,

510 U.S. 908 (1993). A prevailing party seeking an award of

attorneys’ fees has the burden of establishing the exceptional

character of the case by clear and convincing evidence.’

See B. Braun Medical, Inc. v. Abbott Labs., 124 F.3d 1419,

1429 (Fed. Cir. 1997). For an alleged infringer to recover

attorneys’ fees under § 285, “[t]here must be some finding

of unfairness, bad faith, or inequitable conduct on the part

of the unsuccessful patentee.” Stevenson v. Sears, Roebuck

& Co., 713 F.2d 705, 713 (Fed. Cir. 1983) (citations omitted);

see also Badalamenti v. Dunham's, Inc., 896 F.2d 1359,

1364-65 (Fed. Cir.), cert. denied, 498 U.S. 851 (1990);

Advance Transformer Co. v. Levinson, 837 F.2d 1081, 1085

3. Clear and convincing evidence is a more exacting sandard

than proof by a preponderance of the evidence, but is not as high a

standard as the burden of proof applied in criminal cases which is

proof beyond a reasonable doubt. Clear and convincing proof leaves

no substantial doubt in the fact finder’s mind. It is proof that

establishes in the fact finder’s mind not only that the proposition at

issue is probable, but also that it is highly probable. It is enough if

the party with the burden of proof establishes its claim beyond any

substantial doubt. It does not have to dispel every reasonable doubt.

See Sand, Siffert, Loughlin & Reiss, Modern Federal Jury

Instructions, Instruction No. 73-3.

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21a

Appendix C

(Fed. Cir. 1988). The alleged infringer must demonstrate

evidence of either wrongful intent or gross negligence.

Machinery Corp. of Am. v. Gullfiber AB, 774 F.2d 467, 473

(Fed. Cir. 1985).

Even if the case is found to be “exceptional,” the court,

in its discretion, may decline to award attorneys’ fees. “After

the district court determines that a case is exceptional there

remains in every case its freedom to exercise its discretion

informed by the court’s familiarity with the matter in

litigation and the interest of justice.” Gardco Mfg., Inc. v.

Herst Lighting Co., 820 F.2d 1209, 1215 (Fed. Cir. 1987)

(internal quotations and citations omitted).

Even an exceptional case does not require in all

circumstances the award of attorney fees. Many

factors could affect this result. The trial judge is

in the best position to weigh considerations such

as the closeness of the case, tactics of counsel,

the conduct of the parties, and any other factors

that may contribute to a fair allocation of the

burdens of litigation as between winner and looser.

S.C. Johnson & Son, Inc. v. Carter- Wallace, Inc., 781 F.2d

198, 201 (Fed. Cir. 1986).

B. Application of Law to Facts

Applying the above principles to the instant case, the

Court finds that with respect to Abbott, ONY and Forest have

shown by clear and convincing evidence that this is an

“exceptional” case within the meaning of § 285, and that

22a

Appendix C

they should be awarded their attorneys’ fees and expenses.

With respect to Tokyo Tanabe, however, the Court finds that

this is not an “exceptional” case and therefore an award of

attorneys’ fees is not appropriate.

1. Abbott

As discussed in detail in the Court’ Equitable Estoppel

Decision, Abbott misled ONY and Forest into reasonably

believing that Abbott did not intend to enforce the Tokyo

Tanabe patents against them. This is not, as Abbott contends,

a case involving mere silence or inaction on the part of the

patentee. To the contrary, the evidence shows that between

1983 and 1994, Abbott was fully aware of ONY’s and Forest’s

activities and that up until 1991, Abbott actively encouraged

Dr. Edmund A. Egan, the president of ONY, in his efforts to

develop CLSE. Such conduct created a duty on the part of

Abbott to advise ONY and Forest about possible infringement

of the Tokyo Tanabe patents, yet Abbott never mentioned

infringement until June of 1994, eleven years after it first

learned about CLSE.

The evidence adduced at trial shows that the reason

Abbott kept encouraging ONY to develop CLSE, even though

it was a possible competitor, was because Abbott wanted to

keep its options open in the event Survanta®, the product

that Abbott had developed based on the Tokyo Tanabe patents,

was not approved by the FDA for commercial sale or did not

work out for some other reason. In other words, Abbott was

betting on two horses—if efforts to develop Survanta® failed,

Abbott could return to ONY and CLSE. Once Abbott finally

got FDA approval of Survanta®, however, it stopped stringing

23a

Appendix C

Dr. Egan along, cut off all contact with him and eventually

asserted an infringement claim against ONY and Forest. Such

conduct amounts to bad faith on the part of Abbott and makes

this an “exceptional” case for purposes of § 285.4

Abbott put forth no persuasive evidence at trial to

contradict ONY’s and Forest’s evidence of its bad faith.

Interestingly, three of the witnesses who would have been in

the best position to provide such evidence, attorneys Donald

Nickey and Margaret O’Brien, and Dr. Jack Gold, were listed

as potential witnesses on Abbott’s witness list but were never

called to testify. Although the Court recognizes that the

burden of proof on the issue of equitable estoppel was on

ONY and Forest, once they put forth sufficient evidence to

establish an equitable estoppel defense. It was up to Abbott

to either rebut such evidence or run the risk of an adverse

verdict. Abbott chose the latter option.

Abbott argues that the “bad faith” necessary for a finding

of exceptional circumstances under § 285 is not the same

“bad faith” necessary for purposes of equitable estoppel.

In other words, according to Abbott, “bad faith” for purposes

of § 285 must be bad faith in the conduct of the litigation of

the iawsuit, not bad faith by a party prior to the lawsuit

commencing. The Court finds this argument without merit.

Although it is true that cases awarding a prevailing

accused infringer attorneys’ fees have normally been those

4. Although the Court’s findings of fact regarding Abbot’s bad

faith contained in its Equitable Estoppel Decision were based on a

preponderance of the evidence standard, the Court finds that the same

evidence also supports a finding of bad faith by clear and convincing

evidence.

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24a

Appendix C

involving bad faith litigation or fraud or inequitable conduct

by the patentee in procuring the patent, Abbott has failed to

cite, nor has the Court found, any cases prohibiting an award

of attorneys’ fees based on the bad faith conduct of the

patentee prior to the lawsuit.

Moreover, even if bad faith in litigating the lawsuit is

necessary for a case to be “exceptional,” such bad faith is

present here. Abbott obviously knew of its own bad faith

conduct prior to the commencement of the lawsuit, yet

persisted in bringing an infringement claim against Forest

and ONY.

Particularly pertinent here is the case of Nordek Corp. v.

Garbe Ironworks, Inc., 1983 WL 223, 221 U.S.P.Q. 632 (N.D.

Ill. April 25, 1983). In Nordek, the district court awarded the

alleged infringer its attorneys’ fees because the patentee

persisted in the litigation in the fact of compelling laches

and estoppel defenses. The patentee pursued the litigation

even though it knew or should have known that the suit was

barred by its own misleading conduct and foot dragging. The

Court concluded that the patentee’s behavior made the case

exceptional:

Prosecution of this lawsuit without investigation

into possible laches and estoppel defenses was

recklessness amounting to bad faith. Plaintiff’s

failure to change its course as defendants’

evidence mounted is clear and convincing

evidence of plaintiff’s bad faith.

See also Encomp, Inc. v. L-com, Inc., 999 F. Supp. 264,

269-70 (D. Conn. 1998) (granting alleged infringer’s motion

25a

Appendix C

for attorneys’ fees because the patentee’s “suit was frivolously

brought in that it failed to access [laches and equitable

estoppel] defenses that would have essentially precluded its

claims.’’).

Similarly, Abbott’s conduct renders this case

“exceptional.” The evidence concerning ONY’s and Forest’s

estoppel defense was in Abbott’s own files and was well

known by Abbott’s own employees well before Abbott sent

its first letter to ONY and Forest asserting infringement.

Nevertheless, Abbott pursued its infringement claim with a

reckless disregard for the facts in an attempt to prevent

Infasurf® from reaching the market. Such disregard for the

validity of claims and defenses is at the core of the definition

of an “exceptional” case under § 285. See Mathis, 857 F.2d

at 753-54.

Having determined that this case is “exceptional” for

purposes of § 285, the Court must next determine whether

to exercise its discretion in awarding attorneys’ fees. -

The Court finds that attorneys’ fees should be awarded in

this case. Under the facts present here, it would be grossly

unjust if ONY and Forest were left to bear the burden of

their own counsel fees. Abbott acted in bad faith and injured

ONY and Forest by subjecting them to an unwarranted

infringement claim and an unwarranted appeal, thereby

forcing them to defend at great expense their right to compete

freely. The provision for attorneys’ fees under § 285 is

available as a deterrent to such conduct.

Abbott contends that attorneys’ fees are not appropriate

in this case because ONY and Forest have already received a

26a

Appendix C

remedy for Abbott’s bad faith conduct, i.e., a judgment

of estoppel prohibiting Abbott from enforcing its patents.

Such an argument, however, ignores § 285 and the purpose

behind it. Section 285 is intended to be a deterrent to

unwarranted infringement claims and to prevent injustice to

those falsely accused of infringing. Although it is true that

the Court’s judgment of equitable estoppel allowed Forest

and ONY to sell Infasurf® without interference from Abbott,

that judgment did not make Forest and ONY whole.

They were forced to a substantial amount of money in counsel

fees before they could obtain that judgment. Failure to award

attorneys’ fees under such circumstances could encourage

other patentees who are guilty of bad faith conduct similar

to Abbott’s to bring unwarranted infringement claims in the

hope of forcing the alleged infringer to settle the claims rather

than expend substantial financial resources litigating them.

Abbott also argues that the Court should decline to award

attorneys’ fees because this was a close case for equitable

estoppel, as evidenced by the advisory jury verdict finding

no estoppel. The Court finds this argument unpersuasive. The

Court rejected the jury’s advisory verdict because in the

Court’s view, it was not consistent with the evidence

presented at trial. The Court has made specific findings of

fact in its Equitable Estoppel Decision regarding Abbott’s

bad faith conduct. These facts show by clear and convincing

evidence that Abbott was acting in bad faith before the

litigation and continued acting in bad faith by pursuing its

infringement claim in the fact of such facts. Simply because

the jury failed to come to the same conclusion as the Court

does not necessarily make this a close case.

27a

Appendix C

Finally, Abbott argues that attorneys’ fees should not be

awarded because it was ONY and Forest, not Abbott, who

brought the lawsuit. This situation was addressed by the

Federal Circuit in Machinery Corp. of Am., 774 F.2d at 474.

There, the Circuit Court considered the situation where a

declaratory judgment action is brought against a patentee by

an erroneously accused infringer and concluded that the trial

court could consider whether the patentee acted in bad faith

in making the threats of infringement that led to the filing of

the declaratory judgment action and whether the alleged

infringer reasonably believed its only or best recourse was

to file suit. Jd.

Here, as already stated, the Court finds that Abbott was

acting in bad faith by making its threats of infringement.

Forest and ONY acted reasonably when confronted with these

threats. Accordingly, the fact that it was ONY and Forest

that brought the lawsuit rather than Abbott is of no

consequence.

In sum, the Court finds that Abbott’s bad faith conduct

makes this an “exceptional” case for purposes of § 285, and

that Abbott should be required to pay attorneys’ fees in order

to prevent a gross injustice to ONY and Forest and to deter

Abbott and other patentees from similar conduct in the future.

2. Tokyo Tanabe

The Court finds that ONY and Forest have failed to

establish that this is an “exceptional” case for purposes of

§ 285 with regard to Tokyo Tanabe. As the Court found in its

Equitable Estoppel Decision, ONY and Forest failed to show

28a

Appendix C

at trial any misleading or bad faith conduct on the part of

Tokyo Tanabe. Although Tokyo Tanabe was aware of Forest’s

and ONY’s activities, there was no relationship between

Tokyo Tanabe and ONY which created a clear duty to speak,

as there was between Abbott and ONY. Tokyo Tanabe simply

stated in the background and remained silent. Such conduct,

without more, does not make this an “exceptional” case under

§ 285.

Forest and ONY also argue that this is an “exceptional”

case for purposes of § 285 because, as both this Court and

the Federal Circuit found, Abbott and Tokyo Tanabe failed

to present any evidence regarding the water content of CLSE,

and therefore could not have possibly succeeded on their

infringement claim. Though this is a close call, the Court

finds that an award of attorneys’ fees based on Abbott’s and

Tokyo Tanabe’s failure to prove their infringement claim is

not warranted in this case. Although Abbott and Tokyo Tanabe

failed to present any direct evidence to prove the water

content of CLSE, they did present plausible yet untenable

arguments regarding claim construction and the doctrine of

equivalents. “Mere error [in concluding that a patent was

infringed] does not approach the level of bad faith or gross

negligence necessary to characterize a case as exceptional.”

Machinery Corp. of Am., 774 F.2d at 474.

In sum, the Court finds that an award of attorneys’ fees

against Tokyo Tanabe is not warranted under the facts and

circumstances present here.

PSE g TT ee ee CN eT AT ee i

29a

Appendix C

CONCLUSION .

For the reasons stated, the Court grants plaintiffs’ motion

for attorneys’ fees and expenses with regard to defendant

Abbott, but denies the motion with regard to defendant Tokyo

Tanabe. In order to assist the Court in determining the proper

amount of attorneys’ fees and costs to which plaintiffs are

entitled, it is hereby

ORDERED that, pursuant to Rules 53 and 54(d)(2)(D)

of the Federal Rules of Civil Procedure, Michael R. McGee,

Esq., of the law firm of McGee & Gelman, 200 Summer

Street, Buffalo, New York 14222, is appointed as a Special

Master for the purpose of hearing evidence and reporting on

the reasonable amount of attorneys’ fees and expenses that

Abbott should pay plaintiffs; defendants’ objections to the

plaintiffs’ Bill of Costs; the amount of pre-judgment and/or

post-judgment interest, if any, to which plaintiffs are entitled;

and other related matters; and

IT IS FURTHER ORDERED that the Special Master

shall have all the rights, powers and duties set forth in this

Order and in Rules 53 and 54 of the Federal Rules of Civil

Procedure; and

IT IS FURTHER ORDERED that the Special Master

may communicate with the Court ex parte, either orally

or in writing, and may divulge to the Court, in such

communications, confidential information related to him by

-the parties, which confidences shall be preserved by the

Court; and

30a

Appendix C

IT IS FURTHER ORDERED that the Special Master

shall submit his report, pursuant to Rule 53(e), including

recommended findings of fact and conclusions of law, by no

later than April 1, 2002, whereupon this reference shall

terminate, unless extended by further order of the Court; and

IT IS FURTHER ORDERED that the Special Master

shall be compensated for his services at a rate of $325

per hour for time spent at any hearing, meeting or conferences

with counsel and at a rate of $225 per hour for all other time,

together with all reasonable and necessary expenses incurred

by him in the performance of his duties, and may employ an

associate attorney of his firm, whose services shall be charged

at the rate of $165 per hour; and |

IT IS FURTHER ORDERED that within thirty (30) days

following the termination of this reference, the Special Master

shall provide the Court and the parties with a statement

itemizing his hours worked and expenses incurred in

connection with this reference; and

IT IS FURTHER ORDERED that the Special Master’s

fee and expenses shall be assessed or apportioned amongst

the parties as justice may require at the termination of the

reference, except that the Special Master may apply for

interim compensation if the reference is extended; and

IT IS FURTHER ORDERED that the parties shall

forthwith submit to the Special Master a copy of all previous

submissions regarding attorneys’ fees and costs; and

3la

Appendix C

IT IS FURTHER ORDERED that the Clerk of the Court

shall furnish the Special Master with a copy of this Order;

shall make the file in this matter available to the Special

Master for his review upon request; and shall provide copies

of materials therein as needed, without cost.

IT IS SO ORDERED

s/ Richard J. Arcara

RICHARD J. ARCARA

UNITED STATES DISTRICT COURT

Dated: September 4, 2001

32a

APPENDIX D — OPINION OF THE UNITED STATES

DISTRICT COURT FOR THE WESTERN DISTRICT

OF NEW YORK DECIDED JUNE 23, 1999

UNITED STATES DISTRICT COURT FOR THE

WESTERN DISTRICT OF NEW YORK.

CASE NUMBER: 96-CV-159-A

FOREST LABORATORIES, INC. AND ONY, INC.,

Plaintiffs,

¥.

ABBOTT LABORATORIES AND

TOKYO TANABE COMPANY, LTD.,

Defendants.

INTRODUCTION

Currently before the Court is plaintiffs’ motion following

trial for entry of a judgment that defendants are equitably

estopped from asserting infringement of the patents in suit.!

Oral argument on the motion was held on January 15, 1999.

After carefully considering the evidence adduced at trial,

reviewing the submissions of the parties, and hearing

argument from counsel, the Court finds that defendants are

1. Also pending are the parties’ post-trial motions, pursuant to

Federal Rules of Civil Procedure 50(b) and 59, on the issues of claim

construction, infringement, validity, and willful infringement. The

Court will address those motions in a separate Decision and Order. -

33a

Appendix D

equitably estopped from asserting infringement of the patents

in suit. The following discussion constitutes the Court’s

findings of fact and conclusions of law pursuant to Federal

Rule of Civil Procedure 52(a).

DISCUSSION

I. General Background

The following is a summary of the Court’s findings of

fact regarding the general background of this case.

A. Patents in Suit

This case involves two patents owned by defendant

-Tokyo Tanabe Company, Ltd. (“Tokyo Tanabe”’). U.S. Patent

No. 4,338,301 (the “ 301 patent”), entitled “Lung Tissue

Extract Useful For Treating Hyaline- Membrane Disease And

Method For Producing The Extract,” was issued on July 6,

1982 to Tokyo Tanabe as assignee. U.S. Patent No. 4,397,839

(the “ °839 patent’), entitled “Surface Active Material And

Process For Preparing Same,” was issued on August 9, 1983

to Tokyo Tanabe as assignee. Both patents relate to

pharmaceutical compositions used to treat Respiratory

Distress Syndrome in premature babies. The ’301 patent

expires on May 21, 2000, and the ’839 patent expires on

June 1, 2005.”

2. The ’301 and ’839 patents are referred to collectively herein

as the “Tokyo Tanabe patents.”

34a

Appendix D

B. RDS and Lung Surfactant

Respiratory Distress Syndrome (“RDS”) is, when

untreated, an often fatal condition that afflicts thousands of

premature infants throughout the world each year. Until

relatively recently, RDS was the leading cause of mortality

in premature infants.

The search for a cure for RDS was the subject of research

by scientists throughout the world for almost 35 years.

In 1959, Dr. Mary Ellen Avery discovered that premature

infants suffering from RDS had an insufficient amount of a

substance known as “pulmonary surfactant” in their lungs.

Dr. Avery theorized that surfactant might be produced by

specialized cells in the lung and that the lungs of premature

babies might not be developed enough to produce a sufficient

amount of surfactant. Subsequent research has shown that

Dr. Avery’s theory was correct.

Today, it is accepted that lung surfactant is essential to

respiration. During the process of breathing, air is inhaled

into the lung and passes through a tree-like network of

bronchial tubes which branch and divide again into smaller

and smaller passages. The most diminutive “twigs” in the

bronchial passages are bronchioles which are under one

millimeter in diameter. The bronchioles end in tiny air ducts

which lead to groupings of microscopic air sacs called alveoli,

each of which is a mere one thousandth of an inch across.

A developed lung contains hundreds of millions of alveoli

which are arrayed on bronchial passages like tiny clusters of

grapes.

35a

Appendix D

It is through the alveoli that oxygen and carbon dioxide

are exchanged in the bloodstream. Each alveolus is lined with

a watery fluid that enables oxygen and carbon dioxide to

diffuse through the single-cell alveolar walls. The gasses then

pass through the alveoli into an entwining network of

extremely small blood vessels called capillaries. During

respiration, the alveoli expand and contract as fresh air is

inhaled and oxygen-depleted air is exhaled.

In the absence of surfactant, the high surface tension of

the watery coating in the interior of the alveolus tends to

pull the alveolar walls inward until the alveolus collapses.

In normally developed lungs, the stability of the alveoli is

regulated by the presence of lung surfactant. Surfactant

possesses “surface active properties,” which simply means

that it reduces surface tension. These properties are inversely

related to surface area. Thus, surfactant has proportionately

greater surface tension-reducing effects on smaller areas and

diminished effects on larger areas. These characteristics make

respiration possible. The reduction of surface tension created

by the presence of lung surfactant keeps the alveoli relatively

rigid and prevents them from collapsing as they are deflated.’

Conversely, the diminished effect of surfactant in larger areas

results in relatively higher surface tension in the expanded

alveolus causing it to recoil rapidly during exhalation.

The lungs of babies with RDS have not developed to the

point that they produce surfactant naturally. As a result, the

high surface tension in the alveoli requires a tremendous

3. Surfactant molecules disperse themselves between fluid

molecules, reducing the cohesive force between them. The term

surfactant is derived from the phrase “surface active.”

36a

Appendix D

amount of energy to inflate them. During exhalation, the

increased surface tension of the contracted alveoli tends to

cause the alveoli to collapse entirely, making it exceedingly

difficult for them to reopen and causing extremely labored

breathing and inefficient respiration. As a result, the skin of

babies with RDS often has a bluish cast because of the lack

of oxygen in the blood and tissues. Left untreated, a premature

baby suffering from RDS will usually not survive.

C. Development of a Treatment for RDS

In the decades that followed Dr. Avery’s research,

researchers throughout the world worked on developing a

treatment for RDS. Early treatments for RDS included:

(1) forcing air or oxygen into the airway of the patient through

a tube; (2) using steroid treatments; and (3) forcing

supplements of certain components believed to be present in

the pulmonary surfactant into the patients. Unfortunately,

these treatments did not significantly reduce RDS mortality

rates. The use of respirators, in fact, tended to damage the

structure of the fragile lungs of the premature infants.

During the 1960’s, 1970’s and 1980’s, different groups

of researchers investigated what has come to be known as

“surfactant replacement therapy.” Surfactant replacement

therapy involves replacing the surfactant missing from a

premature baby’s lungs with surfactant from some other

source.

Different groups of researchers studied the possibility

of using surfactant from animals, such as cows and sheep, as

a possible source of replacement surfactant. However, it was

thought that the presence of a significant amount of animal

protein in such surfactant might be harmful to humans. One

37a

Appendix D

team of researchers headed by Dr. John Clements tried to

solve this dilemma by developing an entirely synthetic

surfactant, but the compound proved ineffective.

D. Dr. Fujiwara and the Tokyo Tanabe Patents

During the 1960’s and 1970’s, Dr. Tetsuro Fujiwara, a

Japanese pediatrician and biochemist, worked together with

Dr. Forrest Adams at the University of California at Los

Angeles Medical School to study surfactant in large animals.

Their research built on studies done by Dr. Goran Enhorning

of the University of Western Ontario, Canada, on surfactant

in smaller animals. When funding for Dr. Fujiwara’s research

in the United States ended, he returned to Japan and continued

his research there.

After his return to Japan, Dr. Fujiwara began working

with researchers at defendant Tokyo Tanabe, a pharmaceutical

company in Tokyo, Japan. With the assistance of Dr. Yuji

Tanaka and Dr. Tsunetomo Takei of Tokyo Tanabe,

Dr. Fujiwara researched cow-lung surfactant and eventually

developed a surfactant replacement composition derived from

cows’ lungs. More specifically, under the method invented

by Dr. Fujiwara, the lungs of freshly-slaughtered cows are

removed and then minced. The minced cow-lung material is

then processed and the surfactant is extracted.

In October 1978, at a hospital in Japan, Dr. Fujiwara

attempted for the first time to use his newly-developed

surfactant composition to treat a premature human baby with

RDS. The treatment was effective and the baby survived.

38a

Appendix D

Dr. Fujiwara and the Tokyo Tanabe researchers

immediately conducted additional testing of the composition

and its effectiveness in treating RDS. On June 2, 1979,

Dr. Fujiwara and Tokyo Tanabe filed a patent application for

their new surfactant composition in Japan. On May 21, 1980,

a patent application was filed in the United States naming

Drs. Fujiwara, Tanaka and Takei as inventors. As stated

above, the United States Patent and Trademark Office

(“PTO”) issued the 301 patent on July 6, 1982.

After additional research, Dr. Tanaka of Tokyo Tanabe

discovered that adding certain lipids known as free fatty

acids enhanced the surface activity of the °301 composition

thereby making it more effective. Dr. Tanaka filed for a patent

on his discovery in Japan on September 10, 1981 and

subsequently filed for a patent in the United States. As stated

above, the PTO issued the ’839 patent on August 9, 1983.

E. Dr. Egan, Dr. Notter, CLL, CLSE and Infasurf

Dr. Edmund A. Egan is a pediatric physician, a faculty

member at the State University of New York at Buffalo

(“U.B.”) Medical School, and president of plaintiff ONY,

Inc. (“ONY”). Dr. Egan is certified in neonatology, which is

the branch of pediatrics dealing with newborn infants, and

was formerly head of the Newborn Medical Program at

Children’s Hospital in Buffalo, New York and chief of the

Neonatology Division in the Department of Pediatrics at the

U.B. Medical School.

Dr. Egan first began researching the functions and

diseases of the lung in about 1973. In the spring of 1980, he

39a

Appendix D

began collaborating with Drs. Donald Shapiro and Robert

Notter, who were both associated with the University of

Rochester Medical School and Strong Memorial Hospital in

Rochester, New York, for the purpose of developing a

surfactant replacement composition for treating premature

babies with RDS. Prior to this time, Dr. Egan had been

researching lung function and lung disease in premature

lambs and Dr. Notter had been researching lung surfactant

generally. Dr. Shapiro was chief of neonatology at Strong

Memorial Hospital in Rochester and was Dr. Notter’s

supervisor.

Dr. Notter’s research responsibility was to formulate,

manufacture, and conduct biophysical testing of the

surfactants. Dr. Egan’s responsibility was then to evaluate

the surfactants biologically in premature lambs. Dr. Shapiro

acted as a consultant. The research by Drs. Egan and Notter

followed on the research done by Drs. Enhorning, Adams,

and Fujiwara.

-In January 1981, Dr. Notter developed a surfactant

replacement composition derived from surfactant extracted

from the lungs of newborn calves. He called the composition

Calf Lung Lipids or “CLL.” The surfactant extract was

obtained by lavaging, or washing it out of, the alveolar spaces

of the lungs of freshly slaughtered newborn calves. The name

of the extract was eventually changed from CLL to “CLSE,”

which stands for Calf Lung Surfactant Extract.

In late January or early February 1981, Dr. Notter

provided Dr. Egan with CLSE for testing in premature lambs

with RDS. In March 1981, Dr. Egan administered the CLSE

40a

Appendix D

to premature lambs and it proved dramatically effective in

allowing the lambs to breath normally. Drs. Egan and Notter

subsequently published several articles regarding their

experiments and laid the groundwork for testing in human

babies.

In June 1983, at Children’s Hospital in Buffalo, Dr. Egan

first used CLSE to treat a premature human baby with RDS.

The treatment was successful and marked the first time a

human baby was successfully treated with a bovine-derived

surfactant in the United States. Dr. Egan thereafter published

the results of his work and commenced extensive clinical

trials of CLSE over the next several years. Dr. Egan ultimately

named the pharmaceutical composition made from CLSE

“Infasurf.”

F. Commercial Development of Tokyo Tanabe

Patents

In early 1983, defendant Abbott Laboratories (“Abbott”),

a large pharmaceutical manufacturer headquartered near

Chicago, Illinois, began investigating the possibility of

commercial development of a lung surfactant composition

for treating RDS in premature babies. Abbott already had a

large presence in neonatal pharmaceuticals, manufacturing

nutritional and other drug products for newborns. Abbott

assigned Dr. Alan J. Gold, its Medical Director of

Pharmaceuticals, to conduct the investigation.

As part of his investigation, Dr. Gold considered whether

Abbott should enter into a licensing agreement with Tokyo

Tanabe to develop a surfactant based on the ’301 and ’839

af”

4la

Appendix D

patents. In August 1983, Dr. Gold spent two days in Japan

meeting with Dr. Fujiwara and representatives of Tokyo

Tanabe regarding their, work on pulmonary surfactants.

During his investigation, Dr. Gold also became aware

of CLSE and the work of Drs. Egan and Notter and arranged

a meeting with them. In November 1983, Dr. Gold met with

Drs. Egan, Notter, and Shapiro in Rochester and learned from

them “virtually everything” about CLSE, including the

development, composition and testing of the surfactant. Trial

Transcript (“Tr.”) at 4938. At that meeting, Dr. Gold told the

three doctors that Abbott wanted to produce a product that

would be protected by a patent. Drs. Egan, Notter and Shapiro

hoped that Abbott would take over the commercial

development of CLSE. Eventually, however, Abbott decided

to proceed with the Tokyo Tanabe product instead because,

unlike CLSE, it was covered by patents. Abbott subsequently

informed Drs. Egan, Notter and Shapiro of its decision.

On February 3, 1984, Tokyo Tanabe granted Abbott an

exclusive license for the Tokyo Tanabe patents in the United

States. Plaintiffs’ Trial Exhibit (“PTX”) 20. After being

granted the license, Abbott developed a commercial product,

based on the Tokyo Tanabe patents, called “Survanta.” Abbott

first used Survanta in clinical trials in the United States in

1985, more than two years after the first baby in this country

was treated with CLSE. Abbott eventually sought approval

from the United States Food and Drug Administration

(“FDA”) to market Survanta. On July 1, 1991, the FDA

approved Survanta for the treatment of RDS in premature

babies. At the same time, the FDA granted Abbott a seven-

42a

Appendix D

year period of market exclusivity under the Orphan Drug

Act, 21 U.S.C. §§ 360aa-360dd.4

G. Formation of ONY, ONY’s Agreement With

Forest, and Abbott’s Claim of Infringement

In 1985, Dr. Egan formed ONY,’ a small pharmaceutical

company, for the sole purpose of developing CLSE and

making it available to children. ONY has a manufacturing

plant in Amherst, New York and employs approximately

20 employees. ONY manufactures only Infasurf and has no

plans to manufacture any other type of drug. Dr. Egan gave

up his full-time job at Children’s Hospital and his full-time

position at the U.B. Medical School in order to run ONY.

4. The Orphan Drug Act creates a financial incentive for the

development of drugs for rare diseases or conditions. A “rare disease

or condition” is one which affects less than 200,000 persons in the

United States or which affects more than 200,000 persons and for

which there is no reasonable expectation that the cost of developing

and marketing the drug will be recovered from sales in the United

States. 21 U.S.C. § 360bb(a)(2).

The most important financial incentive under the Act is a seven-

year period of market exclusivity granted to the first designated drug

that is approved by the FDA for a particular disease or condition.

21 U.S.C. § 360cc(a). The FDA enforces this market exclusivity by

denying all subsequent applications for the “same drug” used for the

same therapeutic purpose. 21 C.F.R. § 316.3(b)(12).

5. ONY stands for Ontario/ New York. Dr. Egan chose this name

because the scientists who were helping to organize ONY were from

Ontario, Canada and New York State.

43a m

Appendix D

In June 1985, the FDA granted ONY’s request for

preliminary designation of Infasurf as an Orphan Drug. By

March 1986, ONY had received Investigational New Drug

(“IND”) status from the FDA and was granted what is

commonly referred to as a “treatment IND,” which allowed

ONY to conduct clinical trials using Infasurf.

In June 1991, ONY entered into an agreement with

plaintiff Forest Laboratories, Inc. (“Forest’’) to develop and

market Infasurf. Forest is a pharmaceutical company located

in New York City. In the agreement, ONY warranted to Forest

that ONY was the sole and exclusive owner of the rights to

Infasurf and agreed to indemnify Forest for the cost of settling

any Claims brought by any third parties.

In June 1994, Carl A. Spalding, Vice President and

General Manager of Abbott’s Pediatric Products Division,

wrote a letter to Forest’s President, Howard Solomon, stating

that, in Abbott’s opinion, there was reason to believe that

Infasurf might infringe the Tokyo Tanabe patents. Prior to

this letter, neither Abbott nor Tokyo Tanabe had ever

mentioned to Dr. Egan, ONY, or Forest that Infasurf might

infringe the Tokyo Tanabe patents. :

On March 13, 1995, ONY submitted a new drug

application (“NDA”) to the FDA for approval to market

Infasurf. On May 24, 1996, the FDA notified ONY that

Infasurf and Survanta are the “same drug” for purposes of

the Orphan Drug Act. See 21 C.F.R. § 316.3(b)(13).

Accordingly, under the Act, the FDA would not approve the

sale of Infasurf until July 1, 1998, the date on which Abbott’s

seven-year period of market exclusivity was to expire.

44a

Appendix D

H. Instant Lawsuit

On March 8, 1996, ONY and Forest commenced the

instant action seeking a declaratory judgment that Infasurf

does not infringe the Tokyo Tanabe patents. They also seek a

declaratory judgment that the Tokyo Tanabe patents are

invalid or that, in the alternative, Tokyo Tanabe and Abbott

should be estopped from enforcing the patents under the

doctrine of equitable estoppel.

Tokyo Tanabe and Abbott counterclaimed that Infasurf

infringes the Tokyo Tanabe patents. They claim that such

infringement is willful. They seek a permanent injunction

that would prevent ONY and Forest from manufacturing and

marketing Infasurf until after both patents expire.

A jury trial commenced on June 12, 1998. Prior to trial,

defendants moved to strike plaintiffs’ equitable estoppel

defense. By Decision and Order filed June 12, 1998, the Court

denied defendants’ motion and ruled, pursuant to Federal

Rule of Civil Procedure 39(c), that it would use the jury in

the case as an advisory jury on the issue of equitable estoppel.

On August 10, 1998, the Court issued a Decision and Order

explaining its reasoning for the June 12, 1998 Decision

and Order.

On July 1, 1998, during the trial, the FDA approved the

sale of Infasurf, but plaintiffs agreed to maintain the status

quo until the end of the trial. On September 11, 1998, the

jury returned a verdict in favor of the defendants, Abbott

and Tokyo Tanabe, on the issues of infringement and validity.

The jury also rendered an advisory verdict in favor of

45a

Appendix D

defendants on the issue of equitable estoppel. The jury also

determined, however, that plaintiffs’ infringement was not

willful.

II. Jury’s Advisory Verdict on Equitable Estoppel is not

Binding

Equitable estoppel is an equitable defense to a claim of

patent infringement and, as such, must ultimately be decided

by the Court, not a jury. ABB Robotics, Inc. v. GMFanuc

Robotics, Inc., 52 F.3d 1062, 1063 (Fed. Cir. 1995) (“estoppel

is an equitable defense to a charge of patent infringement

... Being an equitable doctrine, estoppel is committed to

the sound discretion of the trial judge”), cert. denied, 516

U.S. 917 (1995); cf. Paragon Podiatry Lab. v. KLM Labs.,

984 F.2d 1182, 1190 (Fed. Cir. 1993) (“defense of inequitable

conduct in a patent suit, being entirely equitable in nature, is

not an issue for the jury to decide’’). In this case, the Court

used an advisory jury on the issue of equitable estoppel. The

jury found that equitable estoppel does not apply.

Federal Rule of Civil Procedure 52(a) provides that “in

all actions tried upon the facts without a jury or with an

advisory jury, the court shall find the facts specially and state

separately its conclusions of law thereon.” The use of an

advisory jury does not replace the Court as the true trier of

fact. The responsibility for rendering a decision always

remains with the Court. The verdict of an advisory jury has

no binding effect; the Court may accept the advisory verdict

in whole or in part, or disregard it completely. See Ragin v.

Harry Macklowe Real Estate Co., 6 F.3d 898, 907 (2d Cir.

1993).

46a -

Appendix D

Here, the Court rejects the jury’s advisory verdict on

equitable estoppel because it finds that the proof at trial

established by a preponderance of the evidence that Abbott

and Tokyo Tanabe should be estopped from asserting a claim

of patent infringement against ONY and Forest.

III. Legal Standards for Equitabie Estoppel

Equitable estoppel is not limited to a particular factual

situation, or subject to simple, hard and fast rules.

Nevertheless, the Federal Circuit has articulated a three-part

test to guide courts in determining whether the doctrine of

equitable estoppel should to be applied to bar recovery.

See Gasser Chair Co. v. Infanti Chair Mfg. Co., 60 F.3d 770,

775 (Fed. Cir. 1995); A.C. Aukerman Co. v. R.L. Chaides

Constr. Co., 960 F.2d 1020, 1041 (Fed. Cir. 1992). First, the

alleged infringer must show that the patentee, through

misleading conduct, led the alleged infringer to reasonably

infer that the patentee did not intend to enforce its patent

against the infringer. Second, the alleged infringer must

demonstrate reliance on that conduct. Finally, the alleged

infringer must show that it will be materially prejudiced if

the patentee is permitted to proceed with an enforcement

claim against the alleged infringer. A.C. Aukerman, 960 F.2d

at 1028, 1041. In order to prevail, the alleged infringer must

establish each of these elements by a preponderance of the

evidence. /d. at 1045-46. Once established, this defense bars

all relief on the patentee’s claims of infringement. /d. at 1028,

1041.

47a

Appendix D

A. Misleading Conduct

The first element of equitable estoppel that the alleged

infringer must show is that the patentee, through misleading

conduct, led the alleged infringer to reasonably infer that the

patentee did not intend to enforce its patent against the

infringer. In order to prove misleading conduct, the alleged

infringer must show that the patentee somehow

communicated to the alleged infringer that it did not intend

to press an infringement claim. /d. at 1042. The alleged

infringer may satisfy this requirement by producing evidence

of affirmative statements or conduct by the patentee from

which it is reasonable to infer that the patentee was not going

to pursue an infringement claim. /d.

Misleading conduct by the patentee may also take the

form of silence, if the patentee had a clear duty to speak or

such silence was accompanied by some other factor indicating

that the silence was sufficiently misleading to amount to bad

faith. ABB Robotics, 52 F.3d at 1064; A. C. Aukerman, 960

F.2d at 1042-44. For example, in the most common scenario,

the patentee expressly objects to the alleged infringer’s

activities, but does not follow up with an infringement lawsuit

for some period of years. This is not the only way, however,

that silence can be misleading conduct for equitable estoppel

purposes. ABB Robotics, 52 F.3d at 1064. Rather, inaction

“combined with other facts respecting the relationship or

contacts between the parties” may “give rise to the necessary

inference that the claim against the [alleged infringer] is

abandoned.” /d. (quoting A. C. Aukerman, 960 F.2d at 1042);

see also Scholle Corp. v. Blackhawk Molding Co., 133 F.3d

1469, 1472 (Fed. Cir. 1998) (“When the course of dealings

48a

Appendix D

between a patentee and an alleged infringer is such that the

alleged infringer reasonably infers from the patentee’s

misleading conduct or inaction that the patentee has waived

its patent rights, then the first element of equitable estoppel

has been established absent a statement to the contrary by

the patentee.”); R2 Med. Sys. v. Katecho, Inc., 931 F. Supp.

1397, 1417 (N.D. Ill. 1996) (“For instance, such a duty [to

speak] may arise . . . where the patentee’s conduct encourages

the subsequently challenged activity.”); Stambler v. Diebold,

Inc., 11 U.S.P.Q.2d 1709, 1715 (E.D.N.Y. 1988) (finding that

patent owner had a duty to speak and its silence was

intentionally misleading where it had long known of the

alleged infringement and permitted the conduct to continue),

aff'd without op., 878 F.2d 1445 (Fed. Cir. 1989).

In order to satisfy the misleading conduct

requirement, the alleged infringer need not prove that the

patentee’s misleading of the alleged infringer was intentional.

A. C. Aukerman, 960 F.2d at 1043. The question is whether

the alleged infringer was, in fact, misled. Of course, if there

is evidence of an intent to mislead, that weighs in favor of

applying equitable estoppel. Jd.

B. Reliance

The second element of equitable estoppel that an alleged

infringer must show is reliance. In order to prove reliance,

the alleged infringer must show that it “had a relationship or

communication with the [patentee] which lulled the infringer

into a sense of security” that the infringer’s conduct would

not invite an infringement suit. Jd.; see also ABB Robotics,

52 F.3d at 1064. The fact that an alleged infringer failed to

49a

Appendix D

take affirmative actions to protect itself from an infringement

lawsuit is evidence of its reliance. See ABB Robotics, Inc. v.

GMFanuc Robotics Corp., 828 F. Supp. 1386, 1398-1400

(E.D. Wis. 1993), aff’d, 52 F.3d 1062 (Fed. Cir. 1995);

Wafer Shave, Inc. v. Gillette Co., 857 F. Supp. 112, 124

(D. Mass. 1993), aff’d without op., 26 F.3d 140 (Fed. Cir.

1994).

C. Prejudice

The third element of equitable estoppel that the alleged

infringer must show is that it will be materially prejudiced if

the patentee is permitted to proceed with an enforcement

claim against the alleged infringer. Prejudice may be either

economic or evidentiary. A.C. Aukerman, 960 F.2d at 1033,

1043. Economic prejudice may be a change of economic

position during the period of delay. /d. For example,

economic prejudice may arise where the alleged infringer

will suffer the loss of monetary investments or incur damages

which likely would have been prevented had the patentee

asserted its infringement claim earlier. Jd. at 1033.

Evidentiary prejudice occurs where an alleged infringer

is unable “to present a full and fair defense on the merits,

due to the loss of records, the death of a witness, or the

unreliability of memories of long past events.” Jd.; Advanced

Hydraulics, Inc. v. Otis Elevator Co., 525 F.2d 477, 482

(7th Cir.) (finding prejudice where crucial witness died), cert.

denied, 423 U.S. 869 (1975); Wafer Shave, 857 F. Supp. at

126 (holding that lost opportunity to preserve important

documentary and testimonial evidence constitutes prejudice);

Motorola, Inc. v. CBS, Inc., 672 F. Supp. 1033, 1037

50a

Appendix D

(N.D. Ill. 1986) (holding that a long time lag leads inevitably

to some lossof memory and documentation).

IV. Findings of Fact Regarding Equitable Estoppel

Applying the above legal principles to the instant case,

the Court finds by a preponderance of the evidence that

Abbott misled ONY and Forest into believing that Abbott

would not assert an infringement claim against them, that

ONY and Forest reasonably relied on Abbott’s misleading

conduct, and that ONY and Forest will be materially

prejudiced if Abbott is now permitted to proceed with an

infringement claim against them. The following facts are

those the Court finds have been established that support this

conclusion.

A. Misleading Conduct

ONY and Forest have shown by a preponderance of the

evidence that Abbott, through misleading conduct, led them

to reasonably infer that Abbott did not intend to enforce the

Tokyo Tanabe patents against them. This is not, as defendants

contend, a case involving mere silence or inaction on the

part of the patentee. To the contrary, the evidence shows that

between 1983 and 1994, Abbott was fully aware of ONY’s

and Forest’s activities and, in fact, up until 1991, Abbott

actively encouraged Dr. Egan and ONY in their efforts to

“develop CLSE. Such conduct created a duty on the part of

Abbott to advise ONY and Forest about possible infringement

of the Tokyo Tanabe patents. Yet, Abbott never mentioned

infringement until June of 1994, eleven years after it first

learned about CLSE.

Sla

Appendix D

The evidence also shows that the reason Abbott kept

encouraging Dr. Egan in his efforts to develop CLSE, even

though he was developing a potentially competing product,

was because Abbott wanted to keep its options open in case

Survanta did not succeed for some reason. After Survanta

finally obtained FDA approval, Abbott stopped stringing

along Dr. Egan and asserted its infringement claim against

ONY and Forest.

1. Abbott’s Contacts with Drs. Egan and Notter

a. Initial Encouragement and Patent-

ability Search

Even after Abbott decided in February 1984 to proceed

with development of the Tokyo Tanabe product rather than

CLSE, Abbott encouraged Drs. Egan, Notter and Shapiro to

continue their work and solicited from them more information

about CLSE. In March 1984, Dr. Gold sent ‘a confidential

disclosure form to Dr. Shapiro seeking information about

CLSE for the purpose of evaluating its patentability.

Defendants’ Trial Exhibit 473. The last sentence of Dr. Gold’s

letter states, “once again, I appreciate your willingness to

work with us and I look forward to developing a productive

relationship.” The attached confidentiality agreement says

“this letter will confirm the interest of Ross Laboratories

Division of Abbott Laboratories (‘Ross’) in receiving certain

information from you. ...” At this time, Abbott had not yet

started clinical trials with the Tokyo Tanabe product and was

pessimistic about receiving a treatment IND from the FDA

to allow such testing. See PTX 317.

52a

Appendix D

In April 1984, pursuant to Abbott’s request, Drs. Egan,

Notter, and Shapiro submitted a Memorandum of Invention

(“MOI”) to Abbott. The MOI disclosed the details of

everything known about CLSE, including its use and its

method of manufacture. See PTX 665. The MOI explained

that aqueous suspensions of CLSE had first been used

successfully with lambs in March 1981 and that at the time

of the MOI, CLSE was being used in ongoing clinical trials

in human babies. Upon receipt of the MOI, Dr. Gold arranged

for Abbott’s patent department to do a patentability search.

Dr. Gold had previously told Drs. Egan and Notter that

Abbott was concerned about patentability and was only

interested in a product that had patent protection. He also

told them that Abbott had elected to commercialize the Tokyo

Tanabe product instead of CLSE because the Tokyo Tanabe

product had patent protection and CLSE did not. Thus,

Drs. Egan and Notter submitted the MOI to Abbott in the

hope that there would be something patentable about CLSE

and, as a result, Abbott would develop it.

Dr. Egan explained that he and Drs. Notter and Shapiro

“were hoping that we would convince Abbott to

commercialize CLL and make it available to children.”

Tr. 6003-04. He also testified that he understood that, as far

as Abbott was concerned, patent protection “would seem to

be the deciding and crucial difference, as far as the corporate

people were concerned. So we were trying to see if we could

get something, some patent protection for our material.”

Tr. 6004.

53a

Appendix D

On May 29, 1984, Abbott’s patent counsel, Margaret M.

O’Brien, responded by letter to the MOI (the “O’Brien

letter”). Ms. O’Brien concluded that “the chances of obtaining

significant patent protection” for the CLSE product itself or

the process for making CLSE was minimal. PTX 41. Ms.

O’Brien also enclosed “the pertinent references” she found.

Those references were a 1982 article by Dr. Notter and an

April 1981 abstract by John A. Smyth and others. PTX 41.

Despite the fact that in February 1984, Abbott had become

the exclusive licensee of the Tokyo Tanabe patents and

therefore had a vested interest in ensuring that those patents

were not infringed, Ms. O’Brien did not mention the Tokyo

Tanabe patents in her letter and did not attach them as

“pertinent references.” She gave no indication whatsoever

of possible infringement of the Tokyo Tanabe patents. Even

though she purported to have completed a patentability search

for the “surfactant extract,” that is; CLSE, she did not indicate

in any way that CLSE was not patentable due to the existence

of the Tokyo Tanabe patents.

Ms. O’Brien did, however, compliment the work of

Drs. Egan and Notter as “outstanding” and concluded:

“we look forward to working with you in the future.”

PTX 41. In short, she encouraged Drs. Egan and Notter to

continue their work on CLSE even though in February 1984,

Abbott had just obtained an exclusive license to the Tokyo

Tanabe patents.°

6. Ms. O’Brien’s letter stated in its entirety:

We have completed a patentability search for your

surfactant extract and process for making the extract.

(Cont'd)

54a

Appendix D

Dr. Egan testified that when his group received the

O’Brien letter, “we were very disappointed. We really wanted

Abbott to commercialize our material.” Tr. 6007. He also

explained his understanding that:

there was no real patentability of our product. And

we also concluded that our product was not

covered under whatever patents covered the

surfactant that Abbott had licensed from Tokyo

Tanabe. Because if our material had been covered

by those patents, that would have solved our

problem. Then there would have been patent

protection for our material, and that would have

been great with us.

Tr. 4976.

Dr. Egan also testified that as a result of the O’Brien

letter:

I was given to understand that neither the process

nor the material was patentable. And that it was

(Cont'd)

We are enclosing copies of the pertinent references found

in our search.

Based on these references, we believe that the

chances of obtaining significant patent protection for the

extract and process are minimai.

We wish to thank you for your disclosure and the

opportunity to evaluate your outstanding work in the

preparation of a surfactant extract. We look forward to

working with you in the future. Please do not hesitate to

call us if you have any questions or comments.

55a

Appendix D

in the public domain. And that I think by inference,

that it wasn’t clearly covered by the patents that

covered whatever surfactant they had licensed

from Japan.

Tr. 6007.

Likewise, Dr. Notter explained that he concluded that if

the Tokyo Tanabe patents covered CLSE, Abbott could make

CLSE and have patent protection. When Abbott said that

CLSE was not patentable and that Abbott would not develop

it, Dr. Notter understood that to mean that CLSE was not

covered by “any patents, including the Tokyo Tanabe

patents.” Tr. 3360.

From this evidence, the Court concludes that the O’Brien

letter was an important instance of misleading conduct by

Abbott. Abbott solicited Dr. Egan and his group to provide

detailed information regarding CLSE for the purpose of

determining its patentability. Dr. Egan and his group complied

with the request by submitting the MOI. The O’Brien letter

informed Dr. Egan’s group that CLSE was not patentable in

light of “the pertinent references” attached to the letter.

Unexplainably, the letter made no mention of the Tokyo

Tanabe patents nor were they attached as “pertinent”

references. Based on this omission, it was certainly

reasonable for Dr. Egan and his group to infer that the Tokyo

Tanabe patents were not “pertinent” to CLSE. Dr. Egan

testified credibly that he was aware of the Tokyo Tanabe

patents and inferred from their omission from the letter that

CLSE was notcovered by them. _

56a

Appendix D

Having voluntarily undertaken to do a patentability

search for CLSE, Abbott assumed a clear duty to inform

Dr. Egan and his group of any patents, including the Tokyo

Tanabe patents, that already covered his product. Obviously,

a product is not patentable if it is already covered by an

existing patent. Abbott did not mention the Tokyo Tanabe

patents in its patentability search for CLSE, yet now claims

that CLSE infringes those same patents.

Whether the omission of the Tokyo Tanabe patents from

the O’Brien letter was intentional or merely negligent is

irrelevant for purposes of the equitable estoppel analysis.

What is relevant is that the letter misled Dr. Egan and his

group into believing that Abbott would not make a claim of

infringement against CLSE based on the Tokyo Tanabe

patents.

b. Contacts Between June 1984 and April

1986

After sending the O’Brien letter, Abbott continued to

ask for and receive information about CLSE. For example,

on numerous occasions, Dr. Notter provided samples of CLSE

to Drs. Victor Taylor, Darryl Absolom and Ken Hahn of

Abbott for testing. Dr. Taylor also spent time in Dr. Notter’s

laboratory, learning to use the Wilhelmy surface balance, an

instrument used to measure surface tension, and seeing it

applied to CLSE.

In 1984, sometime after the O’Brien letter was sent,

Dr. Notter actually beceme a consultant for Abbott and

continued as such until 1991. During Dr. Notter’s

57a

Appendix D

consultancy, Abbott specifically allowed, and in fact

encouraged, Dr. Notter to continue working on CLSE and

supplying CLSE to Dr. Egan for use in clinical trials at

Children’s Hospital in Buffalo. At no time during Dr. Notter’s

consultancy did Abbott tell Dr. Notter to stop his work with

CLSE or indicate to him that CLSE might infringe the Tokyo

Tanabe patents.

_ Abbott also continued to follow and encourage

Dr. Egan’s clinical development of CLSE. To that end, Abbott

invited Dr. Egan to present his work on CLSE at a December

1984 conference sponsored by Abbott. Other speakers at that

conference included Dr. Avery and Dr. Fujiwara. In May

1985, at a plenary session of the Pediatric Research Meeting,

Dr. Gold even congratulated Dr. Egan on his work involving

CLSE.

c. April 1986 Meeting

In April 1986, Dr. Gold and Dr. Henry Sauls, the

Vice President of Medical Affairs for Abbott, met with

Dr. Egan in his office at Children’s Hospital in Buffalo.

The meeting was initiated by Abbott. The purpose of the

meeting was to discuss CLSE and ONY’s status and to see

whether joint development of CLSE was still possible. Abbott

understood that Dr. Egan was “angry” with Abbott, and

Abbott apparently wanted to clarify any misunderstanding:

Tr. 6150-51. Neither the Tokyo Tanabe patents nor any

possible infringement was mentioned at the meeting.

Following the 1986 meeting, Dr. Sauls sent Dr. Egan a

letter stating that Abbott was “anxiously awaiting” the results

58a

Appendix D

of ongoing clinical trials involving CLSE and suggesting that

“some future collaboration” between Abbott and ONY on

CLSE might be possible. PTX 43. Again, there was no

mention of possible infringement of the Tokyo Tanabe

patents.

In light of this evidence, the Court concludes that the

April 1986 meeting was another important instance of

misleading conduct by Abbott. At the time of the meeting,

Dr. Egan was aware of the Tokyo Tanabe patents and that

Abbott was developing a product under those patents.

Yet Abbott approached him and inquired about possible joint

development of CLSE. Neither the Tokyo Tanabe patents nor

any possible infringement was mentioned at the meeting or

the subsequent letter from Dr. Sauls. Based on these facts, it

was certainly reasonable for Dr. Egan to believe that Abbott

had no intention of asserting an infringement claim against

him.

d. Contacts Between 1987 and 1991

In early 1987, Abbott was still concerned about the FDA

review of Survanta and was afraid that ONY might “somehow

achieve[] approval first” and thus “be able to secure seven

years [sic] market exclusivity.” PTX 248, 326. Abbott

therefore maintained its contact with Dr. Egan.

In the fall of 1987, Dr. Egan was again invited to an

Abbott-sponsored conference, this time in Arizona. At that

conference, Dr. Bruce Holm, who worked with Dr. Notter

and Dr. Enhorning, made a presentation about Infasurf.

In December 1988, Dr. Egan was invited to participate in

59a

Appendix D

another Abbott-sponsored conference in Washington. He and

Dr. Shapiro both made presentations about Infasurf.

This seminar, too, was a public recognition of Dr. Egan’s

contributions to the field. Other participants at that meeting

included Drs. Avery and Fujiwara. In December 1990,

Dr. Egan again was invited to and participated in yet another

Abbott-sponsored conference. Dr. Egan presented results

from a study involving Infasurf. Dr. James Kendig also

presented results from a study involving Infasurf at that

meeting.

Abbott’s relationship with Dr. Egan ended abruptly in

1991, around the time Abbott received final FDA-approval

to market Survanta. After that time, Abbott cut off contact

with Dr. Egan and ONY. For example, Dr. Egan was not

invited to any more Abbott-sponsored conferences after

Survanta was approved. Dr. Notter’s consultancy with Abbott

also terminated in 1991.

2. Abbott Monitored CLSE, ONY and Forest

The evidence at trial shows that Abbott closely monitored

and was fully aware of the development of CLSE during the

1980’s and into the 1990’s. Yet Abbott remained silent and

sat on its rights.

The evidence showed that Abbott maintained a file

identified as “Infasurf(Egan)” which contained press

clippings about Infasurf. PTX 812; see also PTX 44, 50.

Abbott also routinely monitored the surfactant market and

the development of potentially infringing products.

‘

60a

Appendix D

As early as February 1986, Abbott’s internal documents

discuss ONY and CLSE. See, e.g., PTX 244A. In May 1986,

Dr. Gold wrote to Dr. Fujiwara about ONY, stating “there

have been some relatively recent developments which you

need to know. Dr. Enhorning and Dr. Ted Egan (University

of Buffalo) have formed a company called ONY Inc. and

plan to commercialize calf lung surfactant extract (CLSE,

previously known as CLL).” PTX 42. Dr. Gold went on to

say that “they intend to market CLSE in the United States”

and described Dr. Enhorning as “a competitor to Ross,

Abbott, and Tokyo Tanabe.”

In July 1986, Pat Welch, Abbott’s Manager of Drug

Regulatory Affairs, circulated a memorandum about ONY

to several other Abbott employees. The memorandum

enclosed a June 30, 1986 announcement reporting that “ONY

intends to market Infasurf itself, unless a major

pharmaceutical firm becomes interested in the product and

buys ONY ...” PTX 246.

In January 1987, Dr. Gold prepared a memorandum

concerning a telephone call he had received from an Abbott

territorial manager reporting clinical trials of CLSE at

Primary Children’s Hospital in Salt Lake City. PTX 325. Dr.

Gold noted that “with all the activity, there may be things

we don’t know about Dr. Egan’s plans, and there may be

more of a competitive threat than we had believed.” Dr. Gold

then went on to say, “by way of this memo, I’m asking those

listed to seek out whatever information possible about

Dr. Egan’s activities.”

6la

Appendix D

Also in January 1987, Dr. Gold wrote to Tokyo Tanabe,

telling them of ONY’s formation and ONY’s goal of

marketing CLSE: “Dr[.] Egan and Dr[.] Enhorning have

formed a corporation, ONY Inc[.] to bring CLSE to market

in the United States. If they are successful they would

compete with Surfactant TA.”’ PTX 46.

In April 1989, Dr. Gold sent an e-mail to Pat Welch about

the Infasurf trials. Dr. Gold’expressed unhappiness with the

attention that Dr. Egan and ONY were receiving from the

media, noting: “Egan is still at it. 1 got a call from a TM

[territory manager] in Fort Worth. Apparently Infasurf is

being used at some hospital there and the media picked it up

and made a big splash out of it on tv [sic] last nite [sic].”

PTX 334. ;

In June 1989, Dr. Gold sent another e-mail regarding

Infasurf. Dr. Gold noted that “[a] member hospital, McCoy-

D in Ogden, Utah, had reported to them [by a hospital

supplier] that a newspaper article in Salt Lake stated that

the University of Utah was evaluating a product named

Infasurf from a company named ONY, Inc ...” Dr. Gold

acknowledged that he was concerned because “this was

creating a major competitive situation in Ogden ...”

PTX 335.

Abbott continued to follow ONY’s efforts to submit a

New Drug Application (“NDA”) for Infasurf to the FDA.

For example, in January 1987, Dr. Gold wrote a memorandum

7. “Surfactant TA” is the trade name of the Tokyo Tanabe

product marketed in Japan.

62a

Appendix D

in which he discussed a conversation he and Dr. Harry

Gunkel, Abbott’s Director of Clinical Research and Neonatal

Medicine, had with Dr. Shapiro. PTX 326. Dr. Shapiro had

recently met with Dr. Strauss at the FDA. Dr. Gold reported

that Dr. Strauss “was prepared to approve an NDA for CLSE

based on the Egan and Enhorning published studies” and that

“Dr. Egan is preparing the submission at this time.” Dr. Gold

also noted the concerns voiced by Dr. Shapiro that Dr. Egan

“will have an approved NDA before [Abbott] .. .”

In February 1987, Michael Haney, Abbott’s Director of

Regulatory Affairs, wrote a memorandum in which he

discussed the Infasurf clinical trials and noted that “ONY

... may have enough data to submit an NDA.” PTX 248.

In February 1989, Dr. Gold received a memo from Dr. Gunkel

discussing a conversation between Drs. Gunkel and Shapiro.

Dr. Shapiro “urged [Abbott] to ‘get aggressive’ about Egan’s

uncontrolled work and the damage it might be doing at FDA

and in the public eye.” PTX 333.

Abbott was well aware of the progress of Infasurf because

Infasurf was widely used at clinical centers where Abbott

had representatives. Since 1983, Infasurf has been the subject

of about 13 clinical trials, involving approximately

55 institutions and 100-200 investigators. Approximately

16,000 babies in this country were treated with Infasurf before

Abbott finally said anything about possible infringement in

June 1994. Tr. 4883-84, 4897-98, 4901.

Abbott was also aware of Dr. Egan’s work because he

and his colleagues regularly reported their work in the

scientific literature, as well as at meetings, seminars, and

63a

Appendix D

conferences attended by Abbott and its consultants.

Altogether, Dr. Egan published approximately forty abstracts

and papers relating to CLSE or Infasurf. Dr. Notter published

over 200 such abstracts and papers concerning surfactants.

Yet, until 1994, Abbott remained silent.

Significantly, in addition to following the development

of CLSE, Abbott was aware that Dr. Egan believed that CLSE

was not covered by any patents. For example, in 1985, ONY

applied to the FDA for Orphan Drug status for Infasurf.

At the time, Orphan Drug status was only available for drugs

that were not covered by a patent.® Abbott knew that Infasurf

had received this status because it had a copy of the “Pink

Sheet” (a widely distributed trade publication) that reported

this information,-and because they requested and received

information about ONY’s Orphan Drug status from the FDA.”

PTX 246, 296.

Abbott also was aware of Forest’s activities related to

Infasurf. Abbott had access to various trade publications, such

as the Pink Sheets, reporting the agreement between ONY

and Forest to market the Infasurf product. For example, the

8. See Orphan Drug Amendments of 1985, Pub. L. No. 99-91,

§ 2, 99 Stat. 387, 387 (1985).

9. Abbott knew from other sources as well that ONY believed,

and was telling others, that Infasurf was not the subject of patents.

For example, Abbott’s files included a newspaper article in which

ONY described its product as unpatentable. PTX 50. In 1991, the

Pink Sheet also reported that Infasurf was not patentable. PTX 813.

64a

Appendix D

July 15, 1991 Pink Sheet produced from Abbott’s files

reported:

Forest Labs Licenses ONY's Infasurf Lung

Surfactant under an agreement disclosed in

Forest’s recently released annual report for the

fiscal year ended March 31.‘We have just

completed a license arrangement with ONY, Inc.

covering a surfactant for use in neonatology units

which we believe is a superior product in a rapidly

growing market,’ Forest said.

PTX 813.

In addition, in 1991, an Abbott document records that

Forest is “the companybacking Infasurf.” PTX 56. And in

October 1993, an Abbott consultant attended aForest seminar

at which Infasurf was discussed. PTX 1193.

3. Abbott’s Motive

While motive is not an element of equitable estoppel

that must be proven in order to successfully assert that

defense, in this case, understanding Abbott’s motive reveals

the misleading nature of its conduct. An cbvious question

here 1s why Abbott would continue to encourage Dr. Egan, a

potential competitor, in his efforts to develop CLSE even

after Abbott had decided to develop the Tokyo Tanabe

product. The evidence adduced at trial shows that Abbott

did so because it wanted to keep its options open in the event

that Survanta, the product Abbott had developed based on

the Tokyo Tanabe patents, was not approved by the FDA for

commercial sale or did not work out for some other reason.

In other words, Abbott was betting on two horses—f efforts

to develop Survanta failed, Abbott could turn to ONY and

CLSE. Once Abbott finally got FDA approval for Survanta,

however, it stopped stringing Dr. Egan along, cut off all

contact with him, and eventually asserted an infringement

65a

Appendix D

claim against ONY and Forest.

This finding regarding Abbott’s motive is based on

reasonable inferences drawn from all the facts and

circumstances in this case. The following summary of facts

highlights the Court’s reasoning:

In 1983, while it was negotiating with Tokyo

Tanabe, Abbott met with Dr. Egan and his

group to learn about CLSE. In 1984, even

after it had taken a license under the Tokyo

Tanabe patents, Abbottrequested the MOI

from Dr. Egan and his group and expressed

itswillingness to work with them to develop

CLSE.

In March 1984, Abbott had not started

clinical trials with Survanta. In fact, Abbott

did not know whether “an IND [would] be

possible using the Tanabe product” and

believed that “the chances seem small.” PTX

wi.

In June 1985, the FDA granted ONY Orphan

Drug status for CLSE. Abbott knew about

this. By March 1986, ONY had received a

66a

Appendix D

treatment IND to conduct clinical trials. By

July 1986, Abbott knew about those clinical

trials. PTX 246.

in 1986, Drs. Sauls and Gold went to Buffalo

to meet with Dr. Egan to discuss possible

joint development of CLSE and to clarify any

misunderstandings. They understood that

Dr. Egan was angry at Abbott and wanted to

keep him friendly. At that time, Abbott still

did not have approval to market Survanta.

After the meeting, Abbott wrote Dr. Egan a

letter suggesting future collaboration

between ONY and Abbott.

Abbott was still concerned in 1987 about the

FDA’s review of Survanta and was afraid that

ONY might “somehow achieve[] approval

first” and thus “be able to secure seven years

[sic] market exclusivity.” PTX 248, 326.

On July 1, 1991, Abbott received FDA

approval for Survanta. The December 1990

Abbott-sponsored conference was the last

Abbott-sponsored conference to which Dr.

Egan was invited. Dr. Notter’s consultancy

also terminated in 1991.

At no time between 1983 and June 1994 did

Abbott ever mention to Dr. Egan or ONY that

CLSE or Infasurf might infringe the Tokyo

Tanabe patents.

67a

Appendix D

h. After Dr. Egan and ONY found another

pharmaceutical company to invest in |

developing Infasurf, Abbott asserted its

infringement claim.

4. Abbott’s Explanations

Abbott denies that it was stringing Dr. Egan along and

has advanced several justifications for its delay in asserting

an infringement claim. However, the Court finds none of them

persuasive.

First, Abbott contends that it cannot be faulted for not

asserting an infringement claim earlier, because up until 1995,

when ONY filed its NDA with the FDA, Abbott was barred

from asserting infringement under the so-called “safe harbor”

provision contained in 35 U.S.C. § 271(e)(1). As explained

in detail infra, the Court finds this contention wholly without

merit. "

Second, Abbott contends that it did not assert an

infringement claim earlier because it did not regard ONY as

a competitive threat. Abbott’s own documents, however, belie

this contention. Those documents show that Abbott was:

(1) closely monitoring ONY’s activities; (2) concerned about

competition from Infasurf; (3) looking for ways to slow ONY

down; and (4) aware of ONY’s Orphan Drug status. See PTX

42, 44, 46, 50, 56, 244A, 246, 248, 296, 325, 326, 333, 334,

335, 812, 813, 1193. Indeed, Abbott characterized ONY as

“creating a major competitive situation.” PTX 335. And,

Abbott wrote to Dr. Fujiwara and Tokyo Tanabe telling them

that ONY was a competitor and advising Dr. Fujiwara not to

68a

Appendix D

assist Dr. Egan’s collaborators. PTX 42, 46. Moreover, even

if it is accepted as true that Abbott did not view Dr. Egan

and ONY as a real competitive threat, this would still not

explain why Abbott actively encouraged Dr. Egan and ONY

to continue their efforts to develop Infasurf, a potential rival.

Finally, Abbott claims that until it ran-tests on CLSE

and Infasurf in 1995, it did not know the complete

composition of those substances and, therefore, could not

have known that there was infringement. This simply is not

true. Abbott had been provided with-samples of CLSE in

1984 and knew as much about CLSE then as it did in 1994

when it finally sent the letter asserting an infringement claim.

Thus, Abbott could as easily have written a letter in 1984 as

it did in 1994,'°

5. Summary of Misleading Conduct

In sum, in light of Abbott’s prior relationship with

Dr. Egan and ONY and its knowledge of their activities,

Abbott’s failure to mention possible infringement before

1994 was sufficiently misleading to amount to bad faith.

When Abbott gave Dr. Egan its opinion on the patentability

of CLSE in 1984, it had a clear duty to mention that CLSE

10. Another possible reason for Abbott not asserting an

infringement claim earlier is that Abbott itself did not believe that

CLSE infringed the Tokyo Tanabe patents because CLSE was a

lavage, not a minced product and had no additives. Indeed, Abbott

told the CLSE developers that the Tokyo Tanabe product was different

from prior surfactants and patentable because it was a minced product

reconstituted with additives. Tr. 3358-59. Of course, Abbott now

denies that it ever believed that CLSE did not infringe the patents.

69a

Appendix D

might already be covered by the Tokyo Tanabe patents, yet it

did not. In fact, from 1983 to 1994, Abbott never even hinted

to Dr. Egan that CLSE might infringe the patents. To the

contrary, Abbott actively encouraged Dr. Egan to continue

his work on CLSE. Abbott was leading Dr. Egan on so that it

could use him as a fall-back position if necessary. Such

conduct was certainly “misleading” under any definition.

B. ONY’s and Forest’s Reliance

The Court finds by a preponderance of the evidence that

ONY and Forest relied on Abbott’s misleading conduct.

Abbott’s misleading conduct lulled Dr. Egan and ONY into

believing that Abbott would not assert the Tokyo Tanabe

patents against them. For example, Dr. Egan testified that he

relied on Abbott’s conduct when he made the decision to

start ONY in 1985:

Q. Now, did the fact that Abbott had not

suggested to you that Infasurf might infringe

its patents, did that fact play any role in your

decision to start ONY?

A. Well, it was an absolutely necessary

condition to start ONY.

Q. Can you explain that?

A. Well, to — if there had been even the

suggestion that we might infringe patents by

somebody as large as and as powerful as

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Appendix D

Abbott, it would have been foolhardy and

nonsensical to start the ONY company.

Tr. 5006-07.

He also testified that the fact that Abbott had not raised

an infringement claim was an “absolutely necessary” basis

for his decision, in 1989, to resign as head of Newborn

Medicine at Children’s Hospital and to take a part-time

position at the U.B. Medical School in order to devote more

time to ONY:

Q. Now, did the fact that Abbott didn’t suggest

that Infasurf might infringe, after ONY was

founded, play any role in your decision in

1989 to change your positions at the hospital

and at the university?

A. Again, it was an absolutely necessary

position, because had Abbott even suggested

that we might infringe the patents, the

possibility of litigation such that [it] is would

have made it impossible to continue.

Tr. 5007; see also Tr. 4798-99, 6028.

Dr. Egan also relied on Abbott’s conduct in 1985 when

he represented to the FDA that Infasurf was entitled to

Orphan Drug status because it was not covered by patents."

As Dr. Egan explained, _ |

Q. Now, did your experience with Abbott and

the discussions that you had with them in

11. As stated above, at that time, Orphan Drug status was not

available to patented drugs.

T7la

Appendix D

1983 and 1984, and the correspondence, play

any role in your willingness to tell the FDA

that Infasurf was not covered by patents?

A. Yes, it did. i

Q. And what role did it play?

A. Well, it was obviously the basis on which I

told the FDA in conversations that our

material wasn’t patentable.

Tr. 6028.

Dr. Egan also testified that in 1991, Abbott’s conduct

was “an absolutely necessary condition” to ONY’s warranty

to Forest that ONY was the sole and exclusive owner of the

rights to Infasurf and to ONY’s agreement to indemnify

Forest for the cost of settling any claims brought by any third

parties. Tr. 5031-32, 6028.

Forest, too, relied on Abbott’s conduct when it decided

to commence and later to continue its relationship with ONY.

Forest knew about the Tokyo Tanabe patents at the time of

Forest and ONY’s negotiations and that the Tokyo Tanabe

patents were licensed to Abbott. Indeed, in the initial

presentation that ONY made to Forest, materials were

distributed which stated “Abbott Laboratories-bovine-

derived product, Survanta, licensed from Tokyo Tanabe.”

PTX 1187.

72a

Appendix D

In addition, during the initial negotiations between ONY

and Forest, Dr. Egan told Forest about his contacts with

Abbott and the opinion of Abbott’s patent counsel that CLSE

was not patentable. Dr. Egan also told Forest about Infasurf’s

Orphan Drug status, the IND for Infasurf, and the clinical

use of Infasurf in thousands of babies.

The fact that Abbott had asserted no patent claim against

ONY reasonably led Forest to believe that there was no patent

infringement problem and was a major factor in Forest’s

decision to enter the Forest/ONY agreement. Harold

Solomon, the President of Forest, explained that at the time

of the Forest/ONY agreement Infasurf had been available

for ten years and “nobody raised any objections to it over

that ten-year period.” Tr. 4002-03, 4126-27, 4302.

Dr. Ronald Albano, who between 1990 and 1996 was

Forest’s Corporate Vice President of Licensing, testified that

he carefully considered the history between Abbott and ONY

during his consideration of whether Forest should enter an

agreement with ONY:

Well, we, in doing our due diligence, were quite

comfortable with the fact that Dr. Egan had an

open relationship with Abbott. And they were

aware of the development of Infasurf. And this

was 1990. He had presented the product to them

in 1983, seven years had gone by, and a lot of

events that were in the public domain had

occurred, which all gave — all of these events

gave us great comfort. Because if there had been

any problems with Abbott, they would have

73a

Appendix D

emerged. There would have been some indication

of a problem. And the fact that there hadn’t been

any, it just confirmed our own belief that there

wasn’t any problem.

Tr. 4694-95.

Dr. Albano also acknowledged that Forest was a risk- -

averse company:

And in all cases, we looked for products that had

the bulk of the development done. Because we

were a very risk-averse company. And we sought

to take products that had proven safety record,

proven clinical efficacy, and a clean track record

in terms of any hindrances, including any legal

— pending legal actions or possible patent

problems.

Tr. 4669.

Mr. Solomon also testified that Forest was a risk-averse

company that sought to license “proven” products without

potential patent problems. Tr. 4669. He explained that Forest

would have avoided a known risk of a patent infringement

lawsuit with Abbott:

Q. Now, let’s go back to 1991 for a minute.

As far as you were aware, at the time of the

Forest-ONY agreement, had anyone made a

claim that Infasurf infringed the patent?

ee ee

74a

Appendix D

A. No.

Q. And did that knowledge play any role in your

decision to enter into the Forest-ONY

relationship?

A. Yes, it did.

Q. And can you explain that role?

A. Well, if somebody made a claim for a patent

infringement, we would have had to

reconsider whether we wanted to go ahead

with the transaction, because we don’t want

to buy a lawsuit, take the risks of a patent

lawsuit, or the expense or the delays involved

in a lawsuit. It would have increased the risk

of the transaction, every transaction has a

certain risk, is the product going to be

approved, is it going to be successfully

marketed. Are you going to have a problem

whether you’re going to be able to sell a

product at all. You have to take that as an

additional risk element. And if a major

company like Abbott was going to claim

patent infringement, I’m pretty certain we

would not have gone ahead with the

transaction.

Q. Does Forest have a philosophy about the type

of products it licenses?

———————

75a

Appendix D

A. Yes.

Q. And what’s its philosophy?

A. Well, we have never licensed a product that

had a patent problem with it. And we license

products from other companies all the time,

and look at products all the time, and we

certainly don’t want to get involved in patent

lawsuits.

Tr. 4126-27.”

Had ONY and Forest been on notice of Abbott’s intention

of asserting the Tokyo Tanabe patents, they could have taken

steps to avoid further harm, such as declining to pursue

further development of CLSE or altering the chemical

composition of CLSE to avoid an infringement claim.

But, in light of the nature and circumstances of ONY’s

relationship with Abbott and the communications between

them, there was no reason for ONY or Forest to anticipate

that Abbott intended to or was likely to assert the Tokyo

Tanabe patents. Thus, there was no reason for ONY and

Forest to take any steps to protect themselves. The fact that

ONY and Forest failed to insulate themselves from Abbott’s

infringement claims and, instead, continued to invest heavily

in Infasurf is strong proof of reliance.

12. Although the Court recognizes that the testimony of

Dr. Albano and Mr. Solomon was self-serving, the Court found these

witnesses wholly credible and gives full credence to their testimony.

76a

Appendix D

Abbott argues that ONY and Forest cannot be found to

have relied upon Abbott’s conduct because Dr. Egan, based

on his own review of the patents, believed that CLSE and

Infasurf did not infringe the Tokyo Tanabe patents. The Court

finds this argument without merit.

The evidence adduced at trial showed that Abbott’s

misleading conduct significantly contributed to Dr. Egan’s

belief that there was no infringement. Although Dr. Egan

did testify that in 1986, he reviewed the Tokyo Tanabe patents

and concluded that CLSE did not infringe them, he also

testified repeatedly and credibly that his conclusion was based

in part on his history with Abbott and what Abbott had told

him. Tr. 5849-50, 6010, 6026-28. The fact that Abbott said

nothing about infringement for eleven years confirmed

Dr. Egan’s belief that there was no infringement. See A. C.

Aukerman, 960 F.2d at 1044 (“The length of the delay also

favors drawing the inference because the longer the delay,

the stronger the inference becomes.”’).

Under Abbott’s theory, equitable estoppel would never

apply to an alleged infringer who relied both on the patentee’s

conduct and his own belief that his product does not infringe.

The fact that Dr. Egan might have believed that his product

did not infringe the patents does not negate his reliance on

Abbott’s misleading conduct. “To hold that [an alleged

infringer] who believes his device does not infringe, but who

also relied upon the inaction of the patentee may not assert

the defense of equitable estoppel, is contrary to the principles

of equity.” ABB Robotics, 828 F. Supp. at 1398 n.27;

see also Adelberg Labs., Inc. v. Miles, Inc., 921 F.2d 1267,

1274 (Fed. Cir. 1990) (finding that the alleged infringer’s

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“generation of documents in anticipation of being sued” did

not indicate that it had abandoned its claim to an estoppel

defense and noting that “certainly [the alleged infringer]

might have reasonably believed that [the patentee] had

abandoned its claim, but still wanted to prepare itself in case

[the patentee] did bring a claim against it”); Advanced

Hydraulics, 525 F.2d at 479 (finding reliance on patentee’s

misleading conduct even though infringer also had informed

patentee that infringer’s internal investigation indicated there

was no infringement); Wafer Shave, 857 F. Supp. at 123

(“In this case, [the alleged infringer] was advised by its

counsel that it was not infringing the patent. The fact that

[the alleged infringer] may have relied in part on this advice

does not negate the fact that it also relied on the patentee’s

apparent abandonment of [its] infringement claim.”).

In sum, Abbott’s misleading conduct would have lulled

any reasonable person in Dr. Egan’s position into believing

that Abbott did not intend to assert the Tokyo Tanabe patents

against him. After all, Abbott gave every indication that it

wanted Dr. Egan to develop CLSE. With Abbott actively

encouraging his work, it never would have entered Dr. Egan’s

mind that Abbott might someday assert an infringement claim

against him.

C. ONY’s and Forest’s Prejudice

The Court finds by a preponderance of the evidence that

ONY and Forest will be prejudiced as a result of their reliance

on Abbott’s misleading conduct if Abbott is permitted to press

its infringement claim. This prejudice is both economic and

evidentiary.

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The economic prejudice to ONY includes the money

ONY has already spent developing Infasurf and the debt that

it has incurred and cannot repay as a result of having had to

borrow money from Forest to pay the legal fees in this action.

As Dr. Egan explained, ONY planned to pay off that loan

from the sale of Infasurf. Tr. 5042-43. If ONY cannot sell

Infasurf, its only product, it will obviously be bankrupt..

The economic prejudice also includes the severe impact

on ONY’s employees; eleven employees have already been

laid off and the remaining employees will be dismissed from

their jobs if ONY is unable to market its only product. Severe

economic prejudice will also be suffered by Dr. Egan, who

gave up his full-time job at Children’s Hospital and his

full-time position at the U.B. Medical School in order to run

a company that now may be bankrupt.

Forest, too, has suffered economic prejudice. Rita

Weinberger, Forest’s Director of Finance, testified that Forest

spent almost eight million dollars on the Infasurf project from

June 1991 through June 1994. Mr. Solomon, Forest’s

President, testified that Forest has spent “thousands” of hours

on the Infasurf project. Tr. 4003-04. If defendants are allowed

to assert their infringement claims, Forest will lose its

opportunity to recover its investment from the sale of

Infasurf.

ONY and Forest have also suffered evidentiary prejudice

as aresult Abbott’s delay in asserting an infringement claim.

Documents have been lost and witnesses have died during

the time Abbott chose not to alert ONY of possible

infringement concerns. Had Abbott not waited eleven years

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to assert its infringement claim, ONY and Forest may have

had a better chance to present a full and fair defense to

infringement and to better support its assertions of invalidity

and equitable estoppel.

For example, Dr. Shapiro, who co-authored a number of

articles concerning the use of CLL in sheep and who was

involved in early discussions with Abbott, died in 1989.

Dr. Shapiro would have been able to testify about the

development of CLL and the meetings and conversations that

he had with Abbott about CLSE. Dr. Notter also testified

that Dr. Absolom at Abbott “died a few years ago.” Tr. 3365.

Dr. Absolom could have testified about the samples of CLSE

which Dr. Notter gave him and about what Abbott did with

them. He also could have testified about the work he did

with Dr. Holm, another colleague of Drs. Egan and Notter.

Relevant documents also are missing which might have

been available if not for the passage of time. For example,

Dr. Notter testified that certain documents regarding the

preparation of CLL batches in 1981 are gone. These

documents are significant because Abbott argued to the jury

that Dr. Egan had not corroborated the testing of CLL in

sheep. Thus, their absence now has prejudiced ONY’s legal

position.

V. Safe Harbor Provision

Defendants argue that the defense of equitable estoppel

cannot be asserted in this case because up until 1995, when

ONY filed its NDA for Infasurf with the FDA, defendants

were barred from suing plaintiffs for infringement under the

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so-called “safe harbor” provision contained in 35 U.S.C.

§ 271(e)(1), which provides, in relevant part, that:

[i]t shall not be an act of infringement to make,

use, offer to sell, or sell within the United States

or import into the United States a patented

invention ... solely for uses reasonably related

to the development and submission of information

under a Federal law which regulates the

manufacture, use, or sale of drugs...

(emphasis added). Defendants contend that ONY was

conducting clinical trials of Infasurf during the 1980’s and

1990’s for FDA-approval purposes and that they were

therefore prohibited by the safe harbor provision from

bringing an infringement action against ONY during that time

period. Thus, defendants argue, because they were legally

prohibited until 1995 from suing ONY for infringement, they

should not be barred by the doctrine of equitable estoppel

from asserting such a claim now. The Court finds this

argument unpersuasive.

First, Abbott initially learned of plaintiffs’ product in

1983, before the safe harbor provision became effective in

1984. More importantly, even if defendants were barred by

the safe harbor provision from bringing an infringement

lawsuit against plaintiffs before 1995 when ONY filed its

NDA," there is nothing in the statute that would have

prohibited defendants from communicating to plaintiffs

13. 35 U.S.C. § 271(e)(2) provides that the safe harbor provision

of § 271(e)(1) ends when an NDA is filed for the purpose of marketing

the drug.

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before that time that they believed Infasurf infringed

defendants’ patents and that they intended to bring an

infringement claim against plaintiffs if plaintiffs took steps

to market the product. Cf. Scholle Corp., 133 F.3d at 1472

n.1. In fact, that is exactly what defendants did in June 1994

when they warned plaintiffs by letter that there was reason

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